Blessed by the Potato

It’s been a while since I spewed my incoherent thoughts out about a potential investment, and that’s due in no small part to the fact that a) most of my readers don’t want to read through these boring things, and b) I’ve been embarrassingly wrong in a number of cases: Priszm turned quite badly against me, and I’ve been kicking myself for going to all the trouble of trying to put a value on POT and AGU, only to see the price go to that level just days after the post, and yet I didn’t buy any due to fear.

For the last few months I haven’t bought anything other than a few little incremental savings into TD’s e-series index funds: we did have two vacations this summer and some car repairs. I still don’t have much money to invest, but I’m thinking of selling some other stocks that have rallied lately (esp. my bank stocks) since I think they might have run their course… but I don’t have anything else waiting to put the cash in!

One company that I’ve seen others recommend is Shoppers Drug Mart (SC).

From the consumer’s side, I’ve liked Shoppers: their stores are usually well stocked, their store brand items are good alternatives, and the stores themselves are often conveniently located with good hours, clean and well-lit. They have their own well-liked rewards card program, and many of their sales are little more than bonus optimum points (they don’t have to do hard discounting to get people in the door). For a long time I considered them a fantastic convenience store: open late, yet with good prices on stuff like snacks and over-the-counter drugs. It’s been a long time since I’ve considered them as a drug store, since their pharmacy counter charges an arm and a leg to fill a prescription (and indeed, anecdotally I’ve noticed that they don’t have much traffic to the pharmacy). Their beauty counter is over-priced, but does great business anyway, I suppose it is high-quality. However in the last year or so I’ve been disappointed by the convenience store side of shoppers, as their non-sale prices on a lot of items has gone up 25+%, so I’ve been shopping there less often for fewer things (basically now I only go if there’s a big sale/bonus points day).

Pretty much every report/analysis I’ve seen rates them a buy, and that’s largely on the basis of their growth. However, I’ve looked briefly a few times and haven’t been wooed: a fair bit of growth is already priced in with a 16X PE, and that’s at it’s current near-low (Shoppers is one of the few stocks to not enjoy a big rally this year). On the surface, it always looked to me like one of those stocks that runs along great until they hit the slightest bump in the road and “correct” hard. Their same store sales growth has been an impressive 5-7% for each of the last several years; on top of the growth in existing stores they’ve been opening new stores to the tune of 5-10% per year — that’s a lot of growth, about 15% per year to the bottom line. However, I have a bit of a personal issue with projecting exponential growth out too far into the future: at some point, that kind of growth has to slow down, and I don’t like holding a stock when “multiple contraction” sets in — as great as a company might be at that point, holding the shares might be painful.

One worrying sign is that all the insider activity over the last few months has been to sell. It’s not a huge portion of the float, only about 0.1% of the outstanding shares have been sold, but it is a little worrying that the insiders don’t want to own SC. Also, I was surprised to see that nearly half their revenue came from the pharmacy side of the business; as a customer I don’t like it — if consumers look to cut expenses they might find numerous other pharmacies that are cheaper to fill their scripts, like I did — and as an investor I’m a little cautious since the pharmacy side is subject to “political risk”.

When it all boils down, Shoppers does seem to be a well-run business, and their rewards program is staying good, which keeps people loyal. It also helps that it’s the only rewards program I know of that gets the cult-like atmosphere going with “exclusive” bonus points days and refer-a-friend programs. I don’t like the P/E over 15, especially in this environment, so I’m going to sit on the sidelines and just watch until the price gets down to $39 or so; maybe it never will, and I’ll be making the mistake of avoiding a paying a good price for a great company in favour of seeking a great price on something that isn’t so great. It wouldn’t be the first time. However, I’ll try to avoid repeating my AGU mistake, and now that I’ve set a price that I think is a good value, I think I will actually buy if it hits that, unless something material comes out (such as new legislation).

On a completely different note, Wayfare was curious as to how I was doing with the active management side of my portfolio, and indeed it’s been a while since I checked myself. Looking back to January, 2008 (a baseline date I selected since it’s about when I changed how I deal with my investments and also before the crisis really got going), the TSX is down 20% and the S&P500 is down 30%. I’m only down about 8% myself. That’s assuming that all contributions that have been made over the last year and a half or so were present at the beginning — buying in slowly during a down market would have given me a boost due to pure luck in market timing even if I had a passive portfolio. The contributions over that time aren’t insignificant: between putting my cash savings and new savings into the market (aside from a small emergency fund, I’m 100% equities now) they’re nearly 70% of my starting portfolio value. I created a Google Finance portfolio with just XIC in it to mimic what would have happened if I had spread out the contributions evenly over the 20 months: this is about the best-case scenario for passive investing, since I actually put the bulk of the cash into the market long before the bottom was in, and since the TSX did better than the S&P500. Nonetheless, I still (narrowly) beat it: the XIC portfolio is down ~9%, which is a better measure since it also includes dividends.

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I didn’t quote it in my last post on the options collar, but it has been said that “options are a zero-sum game”. Options are basically a side bet on the market: for one person to make money, another person had to take the opposite side of the bet and lose. In fact, it’s worse than that, since both parties have to pay fees.

The big problem with zero-sum games is that over the long run you can’t expect to do well (the exception being if you have the skill to take your winnings from other people). That is, after all, what zero-sum means: money/value isn’t produced out of nowhere, it’s only made at the expense of other players.

So why isn’t the stock market itself a zero-sum game? For starters, it’s because the shares represent ownership of actual (generally) profitable companies. You can expect that, as a part owner, you will share in the fortunes of the company through dividends if nothing else. Put another way, over the long term the stock market tracks the economy because it owns a large part of it, so as long as the economy itself isn’t zero sum, everyone can win on the market (and indeed, the very long-term trend has been gains above and beyond inflation in the market as a whole). This doesn’t necessarily hold for very short time periods though, such as day-trading. I’ve also heard the argument that the stock market isn’t zero-sum because there isn’t a counterbalancing position for every share: companies can issue stock (and somewhat more rarely, buy back stock), and so there are more longs in the market than shorts, so therefore it’s not zero-sum. That’s kind of a neat, symmetric mathematical/logical approach, but I like the economic explanation since it seems to have more explanatory power to me — I can see where the money for everyone is coming from.

What else is a zero-sum game? Well, foreign exchange markets are generally considered to be zero-sum games (or again, minus-sum after fees). After all, currency itself doesn’t create value, it merely stores it. There are fiddly external things that can influence that, like interest rate differential “carry trades” that are supported by other pressures maintaining an exchange rate, but for the most part if you’re thinking of following those forex ads, you should understand that the only way to make money is to bet against other people and win.

MW has been popping up in the comments sections of a lot of blogs recently touting an options collar strategy. Larry MacDonald recently briefly touched on the issue. This is an advanced method for reducing risk in your portfolio: you buy an option, essentially insurance, that limits your maximum loss. You then sell the right to buy your shares at a higher price to someone else — that limits your maximum profit, since if the stock goes above that, the person who bought your option will call your shares away. You trade off some of your potential upside to limit your downside. After stomach-wrenching losses in the market over the last year, it sounds pretty attractive.

However, the costs are usually (slightly) stacked against you. Let’s take the example of XIU, an exchange-traded fund tracking the TSX 60.

Today, you could have bought XIU for $16.40. Let’s say you wanted to limit your losses to ~10%, so you want to buy a put at $15 — the ask on that is $0.30 for a put that expires in December. To cover that cost you sell a call for $18 at $0.30 that also expires in December. This collar limits your downside to 8.5% and your upside to 9.8%. Doesn’t sound too bad so far: at almost no cash cost to yourself (there will be commissions as well) you manged to limit your risk while still allowing yourself to reap a decent profit. However, there are a few wrinkles in the collar:

First of all, the commissions are going to be somewhat draining. If we’re dealing with someone somewhat early on in their investing career, then they might have $20k to invest in any one ETF. If the commission is $20 for both halves of the collar, and it has to be reapplied twice a year, you’re looking at only 20 basis points of drag, 0.2%, about what the MER on an ETF is to begin with. Naturally, if you’ve got more money invested the commissions become less oppressive in a percentage basis, but you might run into liquidity problems with the options and pay more in the spread. See comment by MW below, I over-estimated the typical commission for options.

Secondly, there’s the small matter of positive expectation: generally, you expect your stocks to go up, so it’s not like this collar is quite as balanced as it looks: if you expect a 3% average return over the time period of the options (6% over the whole year), then you’re protecting against a return that’s 11.5% below what you expect, but giving up anything that’s more than 6.8% above average. Of course, that ties in to the idea of the risk premium: this strategy reduces risk, so you can’t expect a premium in expected returns. More safety comes at a higher price, and Michael James has a good post on this with a nice graph showing that your expected return actually goes down as you try to draw a tighter collar, to the point where you could have a negative expected return if you want to have a very low risk tolerance.

The next wrinkle is what happens if one of your options is executed? If the market goes down then at least you’re protected — the collar worked for you in this case. But then what do you do? Do you buy back in at a lower price? Do you try to time the market lower? It can add some confusion, and will require some degree of hands-on monitoring (which, IMHO, does not go along with the investor personality that needs this protection). But the bigger issue is what happens if your stocks get called? If the market goes up say 15% in a short time period and you miss out on 5% of that, do you wait to see if it goes back down, or just buy back in right away? If you don’t believe in market timing, and buy back in right away after your options are triggered, then why get the options in the first place? If you do believe in market timing, then why not just do that?

Option collars can be a useful tool to reduce the risk in your portfolio, but IMHO they are too complicated for the benefit they provide. A large portion of fixed income (bonds, GICs) can provide stability and predictably low returns without the hassle. For example, if you wanted to keep your losses at less than 10%, and you figured the largest likely stock market loss was 30% (yes, we did have a larger decline than that recently, but it was also fairly short-lived at that depth), then with 1/3 of your portfolio in stocks and 2/3 in bonds, you’d be set for safety.

The options collar will outperform the largely fixed income portfolio in the cases where stocks to better than bonds, since it’s 100% stocks, even past the point where the stocks get called. It will underperform when stocks do poorly relative to bonds, despite the insurance. Past the point where the call is made, things get tricky because of the issue of market timing and how long it takes you to get back into stocks with a new collar in place, and what gains you miss out on in the meantime. So what we need is a more robust model that includes iterations, cycling through potential market returns and seeing what happens. The best way to do that would probably be with a Monte Carlo simulation, but unfortunately I’m not the person to do that (maybe Michael James will give it a whirl if we ask him nicely?). Here’s one quick shot in the dark though: assuming we have a collar of roughly +/- 10%/yr, fixed income gives 4.4%/year*, and stock returns are along the X-axis, we get the returns in figure 1 (inspired by MJ’s figures).

* – I originally had 3% here for the fixed income part, but in the graphs forgot to multiply that by 2/3 since only that portion of the portfolio earns the interest. It’s easier to change the text to 4.4%, which is still not unreasonable for fixed income, than to go back and redo the graphs :)

Figure 1: the options collar outperforms the fixed income method to safety when stock returns are between 5 and 20%, and again when losses are more than 30%.

Now if we had a good year, say up 15% (and for reference, the market is up over 50% from the bottom last March) and the upper bound of the option collar was exceeded, and we missed out on 5% of the growth before buying back in to the market, we’d start the next iteration down 5% relative to the buy-and-hold portfolios (though the blended portfolio would also be down relative to the all-stock portfolio), and for the next year we’d be looking at the potential returns of figure 2, iteration after a 15% increase in the market.

Figure 2: After the market goes up 15%, if the portfolio with the options collar insurance lags by 5% before it is reestablished, then for the following year it will be behind the all-stock portfolio for all points except >15% loss for stocks, but thanks to the large (but not huge) return of stocks, it is fairing better relative to the blended fixed income. Note that this figure isn’t exact because I haven’t properly accounted for compound returns (if you go up 15% one year, and down 15% the next, you don’t end up back at 0).

If there was a bad year, where the insurance aspect of the collar paid off, and the market dropped 15% (with the collar making you only suffer 10% of that), then we’d be in the situation of figure 3 for the second iteration. Again, I made the mistake of not properly accounting for the compounding, so the numbers aren’t quite right. Nonetheless, you see that even when the collar paid off — when the market was down substantially, the following year the blended fixed income portfolio, which is more hands-off to manage, still outperformed. You’d need to suffer a loss of something like 30% before the options collar starts to outperform the blended portfolio, though in good times (as long as they’re not too good), as mentioned above, the higher stock exposure with the options collar portfolio will beat out the blended one.

Figure 3:

Just from these cases and the complexity, I’m tempted to ignore the possibility of using options collars to manage volatility for me, and I especially won’t be recommending it to more novice investors, who in my experience are the ones who are more averse to stock market losses. Depending on the outcomes, it might outperform a hands-off portfolio with both fixed income and equities, but I’m not convinced there’s enough merit here to make it worth my time to figure out how to run the Monte Carlo simulation that would be needed to see how worthwhile it is as a strategy. This could also be coloured by the fact that I’m looking into this in 2009, as the recent market turmoil may be making the options more expensive than they would be in more normal markets (that is, zero net cost collars might normally be more bullish).

And now, since I don’t like having mistakes up here for long, the corrections to figures 2 and 3. Here I’ve converted things into dollar figures, assuming a $1000 initial portfolio in the first year, and then starting with the proper value in the second year/iteration for corrected figure 2 and 3. I’ve also added a portfolio with 1/3 fixed income (since with the smallish numbers we’re talking here, the protection is equivalent to the options collar — you’d need a >30% loss for the options collar to beat the 2/3 fixed income in that respect). The fixed income portfolios have been rebalanced to maintain the weighting.

Corrected figure 2 (portfolio value instead of percentages, after year 1 15% increase in stocks, collar misses 5% of gain):

Corrected figure 3 (portfolio value instead of percentages, after year 1 15% drop in stocks, collar avoids 5% of loss):

So except for very large losses in the market, a modest amount of fixed income exposure will give better returns with almost as much protection, and a lot less hands-on factors to get in the way! One could argue that the collar is meant exactly for those times when “very large losses in the market” do take place, but those are quite rare, especially if you can have a bit of patience: this year’s market meltdown was one of the worst ever, having gone down over 50% at the bottom; but after just a few months of rallying now, we’re “only” at about a 35% loss from the peak.

By now I know most of you are “TLDRing” this post with all the graphs, but what can I say, I’m a geek.

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There have been lots of stories in the media over the last year or so about people having to postpone retirement because of the effects of the stock market crash on their nest egg (indeed, my dad was briefly afraid he was going to have to come out of retirement, sell the cottage, sell the house, or all three). JC makes an interesting point above: working longer has the double effect of letting you postpone touching your nest egg as well as building it up bigger.

However, I just wanted to run some very simple numbers to show that this is not a very good backup plan. I mean, if you have to, you have to, but just look at what I’m getting at:

Let’s say that you wait until you turn 40 to get your act in gear, your salary has pretty much plateaued, and you start saving 20% of your salary per year until you turn 65, when you plan to retire. Simple math says that you have 0.20(salary) * 25 years = 5 times your salary as your nest egg, assuming that there’s no compounding going on. Compounding at just 3% per year (real return) and you’d have a decent 7.3 times your salary to work with — using the 4% withdrawal rule of thumb gives you about 30% of your working salary to retire on. Not great, but you’ll probably survive, and this is being quite conservative.

Now let’s say that just before you take the golden watch, the market crashes by 30%, and your nest egg is now left at 5.1 times your salary. How much longer would you have to work to get back up to ~7 times your salary? If you keep saving at a 20% rate, and you can’t rely on a bounce in the market (i.e.: no further compounding) — whether that’s because you got scared and sold out, or because you’re just scared enough to not factor it into your plans — then simple math shows that you’re looking at a good 10 additional years of work. True, the real-life situation wouldn’t be that bleak: you wouldn’t need to recover all the way back to what you would have needed to retire at 65, and additionally you could probably manage to save more than 20%/year by cutting back on your spending; saving 50% of your income would mean you’d only need to work an additional ~3-4 years.

Still, that’s a pretty long time to delay your long-planned retirement, and as JC points out, you might not be able to keep it up. So to make sure you don’t get stuck in that situation it’s probably better to plan ahead: include a margin of safety in what you figure your nest egg should be, maybe even plan to keep working for one or two years beyond what you have to just to make sure you have that cushion — after all, if the meltdown came after you’d already retired, it would be that much harder to get back to work. Starting your savings just three years earlier would increase that nest-egg to 8.6 times your salary before the market crash, and if your portfolio crashed 30% you’d still have 6 times your salary, or an extra four and a half years worth of savings thanks to compounding, and that of course gets magnified if you have a greater return than the conservative 3% I arbitrarily picked here.

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Everybody’s moving to Toronto it seems lately, and with that comes the inevitable realization that Toronto has a really high cost of living. What’s a cash-strapped recent grad to do? Rent, of course… which always (no matter how many times it’s debunked) brings about the lament that “renting is just throwing money away.”

Of course money is equally thrown away when buying: interest you pay the bank you’ll never see again, likewise property taxes, transaction fees, condo fees, and maintenance. That’s just the cost of putting a roof over your head. The question is, which option will give you the quality of life you want? If one costs less, or offers more freedom, or has fewer risks, or some compromise combination of those, then which you go for might not be all that simple.

I’ve mentioned before the rule-of-thumb that if a place costs more than 150X the monthly rent to buy, then you’re probably better off just renting that. Today as I was explaining this concept I realized it might be easier to understand in reverse:

So, let’s say that you have a place you want to buy. You get a mortgage that is for all intents and purposes approximately the same as the purchase price (that is to say, we’ll assume the opportunity cost on your downpayment is the same as your mortgage rate, or that 80% — or 95% if you’re a first-time buyer in today’s market — is close enough to 100% for our approximation). Every year that is going to cost you your mortgage rate: right now that might be ~3%, but it could easily go back up to 5-7% within just a few years, especially as the economy recovers and the low, stimulatory rates aren’t as necessary. Just look at how quickly the rates came down.

On top of that, you’ll have property taxes: roughly 0.8% in Toronto. A general rule of thumb is that maintenance and repairs will run about 1% per year (condo owners will likely have fewer repairs to pay for on their own unit, but instead will see this vanish as a condo fee; TANSTAAFL). So let’s say 1.8% per year from this stuff.

Real estate is not liquid, and you’ll likely have to pay an agent something like 5% when you move, and lawyers and the governments will take another 2% as well (especially in the Toronto land transfer tax area). If the average person moves around every 5-7 years, we’re looking at a little over 1% per year when we spread things out over the 5-7 years owning the place. Let’s call it 1.2% so that we sum up to an even 3% with the fees above.

A mortgage rate of 5% + 3% of other “throwing money away” costs is 8% per year. 8%/12 = 0.667% per month. If your rent is costing you 0.667% of the purchase price per month, it probably doesn’t matter whether you buy or rent, financially — flip that around and you’ll see that 1/0.00667 is 150, so that’s where the 150X monthly rent rule-of-thumb comes from. And of course that’s really the upper limit; if you instead take 7% as your average interest rate, plus 3% for the other costs, you’re looking at 120X monthly rent, which pretty much defines the “grey zone” where choosing to buy or rent basically hinges on how long you plan to live somewhere and what you anticipate the average interest rate to be (below 100X, and you’re generally staring at a decent investment that you can snatch up and rent out).

Surf MLS for a while and you’ll find that in Toronto places are selling for over 200X rent — go the other way now, 1/200 = .5% per month, or 6% per year is what the cost of shelter is. The only way that makes sense is if your mortgage is at <3%.

And rates are there… for now. And that explains why the housing market came back from the land of the zombies this spring. Things were crashing out as people finally hit the breaking point with the prices the way they were last fall, combined with the general financial panic. Then as rates hit bottom (and they are at bottom — there is no room left for rates to go lower; it’s only up from here) the affordability didn’t look so bad, so prices have been treading water the past few months, much to the dismay of bears such as myself. But I can’t bring myself to believe that prime rate will hover at just over 2% for more than a year; and buying is barely a breakeven proposition at these rates; much higher and we’re back to real estate being overvalued and due for a crash/correction, eventually.

So, what do I mean when I talk about the costs and quality of life? Well, I’m saying that when you look at the money that goes out the door and is lost completely, the cost of shelter, it’s a fairly significant sum — it is the largest component of pretty much every person’s budget. If a place that rents for $1500/mo sells for $300k right now, that’s just about break-even at an interest rate of 3%. At 5% for the mortgage (plus ~3% for your other lost expenses) that place will cost you $24000 per year to own — over six years, you’re looking at $144k down the drain. Not an insignificant amount of money by any stretch of the imagination, and not an implausible rate (in fact, you’d have to pay about that now to lock in for 5 years rather than play the variable rate game). The rent that’s gone will total $108k over those six years, still not easy for some people to accept, but that’s $36k that you’d have extra: you could get an apartment and a car, or just a condo. Housing and a $6k European vacation every year, or just housing. Throw the savings in your RRSP and retire 5 years sooner. This is enough money that it does affect your quality of life, so it’s a decision that should be made with all due diligence. Or, if you find your quality of life best improved by more housing, and you’re able to pay $144k over six years anyway then instead of renting a similar place, you can find a better one and afford to spend $1900/mo in your first year — enough to upgrade from a 1+den to a 2-bedroom with a second bathroom, or into a building with better amenities, or a better neighbourhood, etc.

Note especially that in this scenario the renter is building exactly as much equity as the owner since we haven’t considered the principal repayment portion of the mortgage to be an expense — that’s considered forced savings here (though again, “actually saving” is a better savings plan). Also remember that I am talking about apples-to-apples comparisons: with condos or townhouses I’m comparing as much as possible to the identical units within the same building.

Now, there are of course more “depending on…” factors. For example, people who buy, especially in my recent-graduate-and-fertile age bracket tend to buy more than they need for the immediate few years so they don’t have to move and waste the transaction fees. That is, they skip the “starter house” and go straight to their “forever house”, but have to pay more for that for the first few years when they don’t need the space (that is to say, if they did decide to rent, they’d rent a smaller place because the only cost of moving up in a rental is the stress, the truck rental, and possibly one month of rental overlap — fairly trivial compared to the direct costs and risks of being house poor by overreaching early on). In favour of the home buyer is the fact that the house price gets “locked in” (though IMHO, that’s not a good thing in this market), whereas the renter is subjected to the ~2% yearly increase in rents (although as my experience has shown, this is negotiable). Still, that’s a fairly minor factor: sapping just $360 of the $6k renters benefit in the second year, and up to $2k in the last year, which again is peanuts compared to the risk of interest rates spiking, having your condo levy a special consideration, or some other major repair. For people with poor financial discipline, the principal portion of the mortgage payments are a form of forced savings; for those who don’t need that structure, only paying the “lost” fees gives you freedom for those situations (job loss/paycut, emergency, etc) to not save if you need to use the money, i.e. it’s easier to manage your cashflow, and you can expect a higher return on those savings to boot.

One peculiar trait that I find baffling is that people who are seemingly allergic to debt and leverage seem to not give a second-thought to leveraging up to 95% on an illiquid asset that then in many cases also becomes their only asset (talk about under-diversification!). Indeed, the run-up in prices over the last few years has been fuelled by increasing amounts of leverage (due in no small part to the relaxing of minimum down payments and increasing amortization times). With great leverage comes great sensitivity to interest rates, so listen well to the words of Carney:

“…over time, things will normalize – interest rates will normalize. And the way to think about managing your personal affairs, I would submit, is can I borrow at what would be a normal rate?” Carney said.

Instead of first-time buyers soberly pondering that question after a good night’s sleep, a hot cup of tea, and a spreadsheet, we get people desperately buying something so that they can “take advantage of historic affordability”. Indeed, it is truly baffling how little independent thought people put into the biggest decision of their lives.

Finally, as was pointed out in the RL discussion that prompted this post, nowhere have I mentioned “property appreciation”. And that’s for the simple reason that if you need to rely on the housing market going up at some ridiculous rate (or I should say, continue going up at some ridiculous rate) just to make your purchase make sense, then you are speculating. Plus, while people seem to think housing prices going up is a good thing (and I suppose for buyers it is better than the alternative), what do you do then? Once prices go up do you sell your home and start renting to realize the gains? It seems that while people want to buy something to get in on the boom, they haven’t really thought through what might happen if they’re right: “I’m like a dog chasing cars, I wouldn’t know what to do with one if I caught it!”. Even less do they consider what might happen if they’re wrong: just look at the rest of the world, or even Toronto’s market during the meltdown last fall: housing prices do not always go up. What happens if they go down and you find yourself needing to sell? You’re a typical Torontonian first-time buyer, so you only scrapped together 5% down, and after a few years of living in your house you have maybe 10% equity — the bank owns the other 90%, and unlike in the US there is no jingle mail, you have to service your debts. But, a small made-in-Canada correction has occurred: only a 10% decline in house prices, nothing like what the subprime meltdown in the States was like… but now you have no equity left; no downpayment to buy your next place, yet your psychological biases may nevertheless prevent you from “selling at a loss”. Since you “locked in” your price when things were high, you can’t even just hold on to the place and rent it out, since you’ll be losing money every month (especially when you consider that beyond the “thrown away” money in the above comparison, as a landlord you need to add a vacancy provision, etc.). It’s not a happy scenario… where’s the downside protection?

So now you get to the bottom of this giant rant and you ask yourself: “Why is Potato ranting about this again? He’s made his point very clearly before, how is just working at the valuation in reverse worth a new 1500-word post?” The answer is two-fold: first, as I explained at the top, I was trying to dispell the “throwing your money away” myth with a co-worker, and found the bottom-up rates approach to be a little clearer and help show where the 150X rule-of-thumb came from. The second is that this morning Wayfare sent me a dozen links to Toronto houses. I’m about a year away from finishing my PhD: we are in no position to buy a house — even it was fairly valued — and yet the grip of housing mania, the emotionality of the whole thing is so surreal that I can’t even convince my own wife of the truth of this. Fortunately, with her being self-employed, and myself being a grad student (and I’ll have no job history when we first move back to Toronto even if I do manage to land a job right away), no lender in their right mind will give us the mortgage to hang ourselves with… but I try very hard to not depend on the rationality of 3rd parties to keep myself out of trouble; after all, while lending standards have tightened up a bit recently, lenders still don’t have a reputation for being terribly rational this decade. Still, it’s hard to fight decades of indoctrination and tradition that buying a house — no matter the cost — is just something you do when you get married and graduate. Like putting on funny hats and having old men in colourful robs hood you, it’s just a tradition that may not make any sense, but you do it anyway because that’s what society expects of you. Of course, the one graduation tradition is a lot less costly than the other.

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