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Goldfish – 3rd Quarter 2017

Submitted by Rita Dillon, CFP

A Microsoft Corp. study in 2015 concluded that humans now have an attention span of just eight seconds. Goldfish have an attention span of nine! The report was 54 pages though so I didn’t read it. This small paragraph will take over eight seconds to read so I’ve likely lost half of the humans already. Too bad goldfish can’t read, at least I’d still have an audience for another second. The humans’ minds have already drifted to their goldfish (did they feed them today??), what HBO series were they watching in 2015, Microsoft, or whether the person next to them looks good naked. Informal research to the latter suggests the answer to that is usually no.

In this study, attention span was defined as “the amount of concentrated time on a task without
becoming distracted”…hello…hello…you can go to the next paragraph now…there’s a squirrel in it.

…..Oh look, a squirrel

Luckily, our attention span is longer than a squirrel which is only one second. Unless the squirrel is focused on an acorn, then it grows to four minutes! We expend a lot of time and energy looking for our acorns and make even greater efforts to not lose focus in the midst of all the wild and constant distractions around us.


We write about distraction because:

  • An eight-second attention span is detrimental to your financial health
  • An eight-second attention span means most of you won’t make it to the end of this commentary

That matters to me as a writer. I wonder if there are some acorns I can drop into this commentary to keep you reading?

Down 33%

We don’t hold out much hope that we humans can throw our brains into reverse and fix our distraction problem. In 2000, we had a 12-second attention span meaning we’ve dropped 33% in just 15 years. Based on our unscientific observations, the decline continues.

Purely from an observational perspective, we don’t see shortened attention spans as a good thing for society as a whole. On the flipside, we have far more opinions on how shortening attention spans can be great for your pocketbooks.

Tweet tweet

As talking points are shortened and tweets replace genuine contemplation and sustained thought, there are more and more investors buying and selling securities without really knowing what they own.

Narratives like buy an index fund for the lower fee, or buy a low-volatility fund because it has less risk, or buy this stock for the nice yield are all dangerous for those with the attention span of a small googly-eyed bowl dweller but can be gifts to the few still capable of exercising sustained thought.

Obviously the collective shortening of our attention spans also contributes to increasing turnover on stock exchanges. Investors who hold stocks for weeks or just months are great counterparties for the long-term thinker. More on those parking their brains at the door later…


Another glitchy thing about our brains is that they’re ill-equipped to understand exponential growth. In other words, we severely underestimate how big numbers can get, which means things turn out very differently in the future than most of us imagined.

To illustrate, let’s tell a story about an emperor, an inventor, the game of chess and a whole lotta rice. This section of the commentary was inspired by a book I read called The Second Machine Age: Work Progress And Prosperity In A Time Of Brilliant Technologies. If you’re interested in reading it, the link above will take you where you need to go to buy it. Don’t go anywhere just yet, you still have to hear about why you should care about a big pile of rice!

Two to the power of (64-1)

Chess originated in the sixth century in the Gupta Empire in what is present-day India. The Emperor was so impressed with the game he invited the inventor to his palace and asked him to name his reward.

The inventor had what seemed like a simple request, he wanted some rice to feed his family. He asked the Emperor to place one grain of rice on the first square of the chessboard, two on the second square, four on the third, eight on the fourth and so on, so that each square received twice as many grains as the previous one.

The Emperor probably said something like “ha ha (this was before LOL), that’s all you want for inventing such a wonderful game? No problem.”

The inventor would have ended up with two to the power of 64-1 or over eight quintillion grains of rice. The pile of rice would be bigger than Mount Everest, for those of us not good with quintillions.

We assume things progressed reasonably well for quite a few squares. We then assume someone’s head got chopped off by the time they got to the second half of the chessboard.

The second half of the chessboard is where things get really weird.

Graph it

If we were to graph exponential growth during a prolonged period it looks like all the action happens towards the end. Try the rice and chessboard experiment with a calculator and piece of paper and you’ll see what I mean.

Beam me up, Scotty

The exponential growth in computing power over the past 50 years, originally predicted by Gordon Moore in 1965, is a current example of being on the second half of the chessboard and is leading to technologies and products we saw in sci-fi flicks a few years ago and thought were improbable. For example, if computing power doubles again over the next two years the world will experience more computing power than in the first 45 years of computers combined.

That’s tough for our minds to imagine. The implications are even tougher to envision. Digital progress has become sudden after being gradual for so long.

Why does it matter?

What we’ve been experiencing presents wonderful investment opportunities to a few while presenting big risks to many. That’s because this type of unprecedented advancement will expose most established businesses to disruption in one form or another. We believe the level of disruption is picking up pace which leaves owners of established businesses at risk.

Enjoy capitalism

This disruption is capitalism at its best. When it occurs it’s because the new product or service was chosen by customers.

Google is far better than the Yellow Pages.

Shopping from home in your pjs is often way better than fighting for a parking spot at the mall.

Having a drone drop off the next book you buy will be faster and cheaper than a truck and its driver.

Having an electric car eliminates time wasted every week at the gas station and delivers more torque to boot. Your concern won’t be the disruption in the supply chain experienced by manufacturers of internal combustion engines and car transmissions, unless you own those businesses in your index fund or for their yield.

The customer wins with these changes. Assuming, of course, the customer’s job hasn’t been replaced with some form of automation.

Let’s find the losers

As disruption continues and unimaginable technologies emerge, more will change and more will lose.

Finding the winners is where most investors will spend their time, but finding the potential losers should be much easier.

The most impactful thing we can do over the next decade is to avoid, as best as possible, those being disrupted. Sometimes the most effective way of making money is to avoid making big mistakes. Don’t get us wrong, we’ll take great investment opportunities when we see them, they’re just harder to find than the losers.

….Oh look, my customers are gone

If you’re concerned that further penetration of online shopping will cause a decline in foot traffic at shopping malls, don’t own them. You don’t have to own retailers for that matter either. You can talk to the management teams of these companies and hear their mitigation strategies. Or listen to how they claim they won’t be affected, or of course, affected less than others. Or you can ignore the entire group and look for a better idea.

You could spend months figuring out what percentage of industrial distributors’ sales is being targeted by Amazon. Then figure out what that means for each company. You can listen to management tell you they’ll be fine. Or you can ignore all the ones you think are exposed, which will take about 10 minutes of work. You don’t need to have all the answers. You don’t have to try to figure out the impact potential future events will have on each company. Just look for an idea you feel more comfortable with that has a less uncertain future value.

The level of disruption will touch more than the obvious industries like distributors, hoteliers, cable companies, advertising agencies, network TV companies, taxi companies and retailers.

We’ll miss a lot

We recently sold our position in Team, Inc. The investment will go down as a mistake. We’ll spend more time talking about it in a future commentary or email to our partners. The reason we briefly mention it here is because one of the reasons the stock underperformed for us was that we believe it’s being hit with some disruption.

A big part of its business is providing maintenance services to large facilities like refineries and chemical plants. Owners of these assets are always looking for ways to reduce the cost of maintenance. Historically, they’d outsource the maintenance to businesses like Team that are more efficient than internal staff. More recently, we believe owners have been using technology to replace Team where they can. Sensors monitoring an asset’s performance can go just about anywhere now, including hard-to-reach areas. Historically you’d have to take the asset down for routine maintenance for a week or two every year. Now, with the right sensors monitoring the right things, assets have maintenance only when the smart little sensor says it’s absolutely necessary. There were some other problems with the investment, but an element of the mistake was that the company was at the early stages of being disrupted on the maintenance part of their business, and we missed it.

Any company in the maintenance business is similarly exposed. Some will disrupt themselves and keep a viable business. Many will just make less money in the future from maintenance contracts, as businesses are able to monitor their assets’ performance themselves.

Good questions are better than uncertain answers

The beauty of how we invest is we don’t need all the answers.

Maybe it’s because we have $160 million (as at December 31, 2016) of our own money invested in our funds. Or because we define risk as losing money rather than looking different from the benchmark. Maybe it’s how we’re wired. Either way, we try to make the easy decisions.

Making hard decisions doesn’t make sense if easier ones are available. We’re very comfortable taking a pass on the hard ones. As digital technologies continue to grow at a fast pace there will be more disruption to many businesses. We’ll continue to ask questions about each company’s future and simply try to avoid the ones that are too tough.

More and more hard decisions not to make

Because there are more companies likely facing structural headwinds because of disruption in their business models, there are more to avoid than when we started nine years ago. Same can be said from a valuation standpoint.

This will make the next nine years more challenging. Have you altered your expectations?

Back to eight seconds

We’re not sure eight-second blurbs will work well for investors going forward. For example, buying an index fund simply because it has a low fee is almost comical when you think of how little goes into that decision.

Who asks about the price of the securities you own in that index fund…wait for it …nobody. Does the overvaluation of the securities you own offset your annual savings? Are your securities overvalued by 5% or 20% − in other words, 500 basis points or 2,000?

Where do you find all the businesses facing disruption more broadly and faster than in the past? Wait for it, the index. Who’s trying to figure out the ones at risk? Nobody. Everything has a price. Most people just don’t know what that is anymore.


It’s more important than ever to take the time for true sustained thought about future business models. Yet it’s happening at a time when our attention spans are shrinking and nobody is taking the time to stop and think. This is where we feel we can bring value. We believe we have the ability to remain focused on the long term as more and more do the opposite.

The summary not worth writing

There’s no point in summarizing as it will take more than eight seconds and will simply repeat what’s above. Thanks again for your trust. We work hard every day to try to be worthy of it.

Interested in reading more about how technology may disrupt our future? Here are some more books that inspired Geoff to write this commentary.

You Deserve the Best

Thank you for visiting our site and familiarize yourself with what we as independent advisors can do to the make your portfolio grow. For those of you who have more than one financial advisor or are being approached by an advisor whose main focus is on reduced fee ask them what you are being expected to give up for a lesser fee. If the answer is NOTHING BE SUSPICIOUS!

You could give up one or more of the following:

Higher net returns. For the last few years the “flavour of the day” has been reduced fees. No one has mentioned the reduced returns that usually accompany lower fees. I am continuously searching for a better alternative at lesser cost to enable the accounts I am responsible for to grow faster. To date I have been unsuccessful.

  1. Less integrated service. They choose to focus on fees rather than the performance of the funds, which does not give you the overall picture.
  2. They tend to ignore the importance of being tax efficient. Payment of unnecessary taxes is a waste of valuable resources, and a hindrance to wealth creation.
  3. They tend to ignore the importance of maximizing gain in a relative low risk Poorer gains over a longer period of time waste an unrecoverable resource – TIME.
  4. They tend to confuse market volatility with risk. Risk is the possibility of permanent loss of your money. A frightening thought for sure. Fluctuation or volatility is your friend. It should be managed to your benefit. Volatility is the ENEMY of those that don’t know the value of their investments and the FRIEND of those that do.
  5. They could be handicap by only offering in house products thus restricting your portfolio to inferior returns. Not all products or managers are created equal. You deserve to have the best working for you.

The foregoing are only a few of the benefits that an independent advisor can offer. For these and all the extra services we provide, the current system of embedded but disclosed fees adequately compensates us for the privilege of striving for excellence on our clients behalf.

If you have found the proceeding information helpful and have any questions or concerns, please feel free to contact Gordon French CFP at 1-888-548-8868 or

P.S. Recent client story: We reviewed a client statement from a “low fee” institution and determined that the gain was approximately ¼ % of what our clients received(net of fees) over the same period of time, thereby confirming some of the previously mentioned concerns.

Wait gain – 4th quarter, 2016

Submitted by Rita Dillon, CFP

Written by Andrew Pastor, portfolio manager

Over the holidays, I read a biography about John Wooden, the legendary college basketball coach. From 1963 to 1975, he won 10 national championships; a record unlikely to be broken. As a fan, I marvelled at his coaching success and wondered how he was able to find that “elusive edge.” Reading it, I expected to find accounts of sophisticated play designs or ahead-of-its-time analytics. Instead the book is filled with simple ideas. For example, at the beginning of the season the players arrived to practice expecting to run drills. To their surprise, Coach Wooden asked them to gather in a circle, sit down and take off their socks and shoes. As the players looked around in disbelief, Coach Wooden proceeded to explain the right way to put on their socks to avoid performance-hampering blisters. It’s a simple routine that any coach across the country could have done, but the idea probably never crossed their minds.

All winning organizations have an “unfair” advantage that others can’t copy. Often what makes them successful is deceptively simple – easy to understand but hard to replicate.

In this commentary, I want to discuss one deceptively simple idea. Why time, specifically using more of it, is the most powerful advantage an investor can have.

Blinking contest

There’s an old saying that if you want to beat the market you can’t be the market. The only way to do better than everyone else is to be different. Blindly straying from the crowd probably means being worse, but having good reasons for being different creates an edge. We refer to this as having a proprietary insight, a view about a stock that isn’t widely shared by others.

Most investors focus on getting an information advantage which means finding data about a business others don’t have. The truth is it’s very difficult to have an informational edge. Our industry is filled with intelligent people analyzing the same company filings and attending the same conferences.

I believe the most overlooked edge an investor can have is time – the willingness to look further out than other people. Fortunately, those who want a time advantage don’t have to wait as long as they used to since investors are holding their stocks for shorter and shorter periods:

Average holding period for NYSE stocksii

1960s 1970s 1980s 1990s 2000s 2010s
8.33 years 5.25 years 2.75 years 2.17 years 1.17 years 7 months


In the 1980s and 90s, the average investor held a stock for two or three years. It was necessary to look out four or five years to have a variant view. Today, having a view about a business two or three years from now can be a proprietary insight.

You probably think this sounds silly. Why would anyone hold a business for seven months and expect a favourable result? Imagine if your neighbour asked for money to buy the local Tim Hortons franchise with the intention of flipping it in seven months. You’d politely say no. But this type of thing happens in the stock market every day.

If all it takes to beat the market is waiting a few extra years, why doesn’t everyone do this? It turns out that this simple idea is very difficult to do in practice.

Three’s company

I’m going to try to illustrate this with a thought experiment. Let’s say we wanted to start a new investment firm (we’ll call it Triple Threat Co.) that’s going to take advantage of other people’s short-term behaviour. I think we would all agree Triple Threat Co. would need three things to succeed:

  1. People (employees)
  2. Environment
  3. Clients

The ideal people are long-term thinkers operating in an environment that discourages short-term behaviour working with a client base that thinks the same way. Unfortunately, it’s hard to find all three ingredients in the same place.

Let’s walk through the checklist of our ideal company.

1. People

The trouble with trying to hire long-term thinkers is that it’s not natural for people to think this way. Most of us are wired to be short-term thinkers.

In the late 1960s, Stanford University researchers proved this by using marshmallows to show how bad people are at delaying gratification (a fancy term for long-term thinking).

The stock market is an adult version of the marshmallow experiment. When people invest, they’re choosing to give up consumption today in order to consume more in the future. Unlike the Stanford study, you don’t know how many marshmallows you’re going to receive or how long you have to wait. It’s the ultimate test of long-term thinking. A test most people are falling short on based on the average holding period.

The stock market is made up of people who resemble the kids in the marshmallow experiment. If you’re buying a stock from someone who has trouble delaying gratification, they’re going to undervalue the kinds of businesses that can grow – the ones we want.

2. Environment

Let’s assume we found enough people who are wired to think differently. The next step is designing the ideal structure. If we have the right people, does the environment really matter?

A recent study by the University of Rochester found that environment had just as much influence as “hard wiring.” The researchers found that if the children felt safe and comfortable, they were more likely to delay gratification (i.e. their performance improved).

How do you create a safe and trustworthy environment in the investment business? It’s easier to figure out what wouldn’t work. You probably wouldn’t tie employee compensation to quarterly or annual performance. You wouldn’t pressure the portfolio managers to own a business simply because it’s in the index and everyone else owns it. Nobody would be forced to sell a stock because the share price fell shortly after buying it.

It sounds simple, but why are these common practices in the industry?

3. Clients

At this point, we’ve found the right people and thought about the right environment. The last step is partnering with the right clients. Even if Triple Threat Co. gets the first two things right it won’t be enough. The only way to be successful is to have all three.

I was recently at a conference in New York and met with an analyst at a reputable hedge fund. We happened to be looking at investing in the same business. We had a long conversation and I was impressed with the depth of his research and insights into the business. At the end of the conversation I asked, “What happens if you’re wrong?” After a long pause he told me that if anyone on his team experiences a loss of more than 10% they’ll be out of a job. No exceptions.

On my way home I reflected on this conversation. Why would savvy investors structure their organization this way? I think the problem stems from them attracting the wrong clients. The investment firm created an environment that catered to the clients’ wants (short-term gratification) but not their needs (helping them get from Point A to Point B). There are dozens of successful hedge funds located within a couple of blocks and clients know if their fund manager underperforms, other options are a building (or even a few floors) away. A short-term oriented client isn’t going to stick with a manager who is down 10% when there’s another manager who might be having a good year just around the corner.

Investing isn’t just luck

EdgePoint is very fortunate to have found an investor base of like-minded people. During periods of heightened volatility our partners not only stayed the course but many invested more money.

Our all-star advisors (you) are one of our most important assets. You allow us to focus on making the investment that’s right for your clients, instead of the one that makes them feel good right now.

One example is how you react to volatility. Many people in our industry view volatility as risk. Understandably, there are few things more uncomfortable than watching your life savings temporarily go down in value. Some investors are so afraid of volatility they build a portfolio to minimize these painful swings.

You view volatility the same way we do – it’s the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t. Markets have been and always will be volatile. It’s our job to know the value of businesses so that we can take advantage of volatility (i.e. buy businesses from people who are panicking) to your benefit.

This is a list of stocks since inception in our Global Portfolio that have gone down at least 10% after we bought them.

EdgePoint Global Portfolio businesses sold at a profit that were down at least 10% during the holding period

Name Drawdown Holding-
period return
Name Drawdown Holding-
period return
AMN Healthcare Services Inc. -66% 367% Makita Corp. -27% 14%
EXFO Inc. -65% 66% Gerresheimer AG -26% 38%
American Express Co -58% 38% Atos -26% 66%
International Rectifier Corp. -57% 41% Interface Inc – Cl A -26% 116%
Harman International -55% 93% Koninklijke Philips NV -25% 10%
LCA-Vision Inc -54% 54% Grupo Aeroportuario Cen-Adr -23% 14%
International Game Technology -50% 10% Nalco Holding Co -22% 46%
TravelSky Technology Ltd., class H -45% 12% Delphi Automotive PLC -22% 87%
Knoll Inc. -44% 54% National Instruments Corp. -22% 30%
BORG WARNER INC -41% 27% Grupo Modelo -20% 13%
Pool Corp. -40% 81% Microsoft Corp. -19% 96%
Altera Corp. -39% 49% Calfrac Well Services Ltd. -18% 15%
Eiken Chemical Co. Ltd. -39% 64% EPAM Systems, Inc. -18% 47%
Kinetic Concepts Inc -36% 71% Dcc Plc -18% 56%
The Progressive Corp. -36% 47% CME Group Inc. -18% 15%
PTC Inc. -35% 97% Tenneco Inc. -17% 123%
Grupo Televisa Sa-spons Adr -34% 14% Kingspan Group Plc. -17% 13%
Xilinx Inc. -34% 43% Fortune Brands Home & Security Inc. -16% 111%
SHFL Entertainment Inc. -33% 122% Drew Industries Inc. -16% 107%
SemGroup Corp., class A -33% 77% Tognum AG -16% 47%
Kabel Deutschland Holding AG -33% 45% Dresser-Rand Group Inc. -16% 44%
HORIBA Ltd. -33% 32% Thomson Reuters Corp. -13% 11%
WPP PLC -32% 26% Markel Corp. -12% 73%
Ryanair Holdings PLC, ADR -31% 128% Schindler Holding – Part Cert -12% 35%
NKT Holding A/S -31% 124% Carlisle Companies Inc. -12% 38%
Hughes Communications Inc. -29% 157% Allison Transmission Holdings Inc. -12% 27%
Hamamatsu Photonics K.K. -29% 65% ManpowerGroup -11% 98%
Willis Group Holdings Plc -28% 32% Misumi Group Inc. -10% 26%

Source: Bloomberg LP. The above includes named that returned at least 10% over their holding period and had at least a 10% drawdown. Drawdowns in local currency, price returns. Holding-period returns in C$, total returns.

Fifty-six times we bought a business thinking we had a proprietary insight only to watch it drop 10%, 20%, sometimes even 60% during our holding period. Unfortunately, volatility doesn’t go away after we buy a business. It also means that if we had a similar structure to the hedge fund we would’ve been fired 56 times!

During many of these downturns, we committed more of your capital to these names as they went down. The result is that you experienced a higher return on your investment than if the stock went straight up after our purchase.

Let’s use a recent example to illustrate how time worked to our advantage. In June 2015, we purchased Ubiquiti Networks, Inc. in the EdgePoint Global Portfolio with an idea of how the business could be much bigger in the future.

Ubiquiti Networks, Inc.

Source: Bloomberg LP. June 1, 2015 to December 31, 2016. In US$.

In the short term, investors worried about a slowdown in Ubiquiti’s end markets and the stock dropped by 19.31%. We looked at the same business and saw the long-term growth potential was still intact. Our thesis gave us the comfort to significantly increase our position and, eventually, our returns.

History has shown that our investment approach is best suited to periods of uncertainty. The greater the price fluctuations, the greater our ability to add value. We can’t take advantage of these movements if we’re forced to sell too early. Without your trust, none of this is possible.

We’re constantly working on getting the right people, environment and clients at EdgePoint and are pleased with our start thus far.

i John Wooden, Wooden: A Lifetime of Observations and Reflections On and Off the Court (New York: McGraw Hill Education, 1997).
ii Warren Fiske, “Mark Warner says average holding time for stocks has fallen to four months”, Politifact Virginia, July 6th, 2016,
iii W. Mischel, E.B. Ebbesen and A.R. Zeiss, “Cognitive and attentional mechanisms in delay gratification,” Journal of Personality and Social Psychology, v.21(2) February 1972: 204-18.
ivCeleste Kidd, Holly Palmeri and Richard N. Aslin, “Rational snacking: Young children’s decision-making on the marshmallow task is moderated by beliefs about environmental reliability,” Cognition, v.126(1), January 2013: 109-144.

Stairway to Heaven, or Highway to Hell?

I read an article in The Economist a few weeks ago about a concept called the Nash equilibrium, named after John Nash who won the Nobel Prize in Economic Sciences for his contribution to game theory. The article highlighted that the Nash equilibrium helped economists better understand how self-improving individuals could lead to self-harming crowds.

The first thing I thought of was the massive rise in “low-volatility” funds and ETF products. If the Nash Equilibrium was applied to these trends it would likely explain that as more and more investors rush into them, the more the promise of low volatility and peace of mind is a fairy tale.

The second thing I thought of was how index funds will eventually find themselves out of synch with the value of their underlying holdings all due to self-improving investors who appear to be acting in their best interest. That is, investing in the lowest fee products possible while often outperforming the majority of investors – otherwise known as an index fund. Why wouldn’t all self-improving investors use this as their solution to build their wealth?

This commentary will help explain why we believe index investing will work (until it doesn’t) and why it will stop working. To explain, here’s a quick story.
It’s all about insight

Let’s go back to the 1980s when index investing was an insignificant part of the market. Every time you bought or sold shares there was another investor on the other side of the transaction with an opinion on that same stock. Your ability to outperform was based on having insight about that stock that the other person didn’t. This was capitalism at its finest – two well-informed investors determining the price of each security.

Luckily for you, there were investors who weren’t always as well informed as you. Or if they were, their information was different:

  • Some would have good insight into the nextquarter, but not the next three years
  • Others were technical investors which meant they waited for a couple of squiggly lines to intersect before buying. As time passed you realized that not many of these guys became rich so assumed they were exploited by you and others like you
  • Some were momentum investors who tried to chase performance by buying when stocks were on the rise and selling on the decline. They always gave you a chance to sell your stocks for a higher price than you thought possible and buy at prices so low it seemed unfair
  • There were those who bought stocks based on a tip from a friend or co-worker without really knowing much about the business. More often than not they’d become donors to your financial health
  • Closet indexers started trending during the 90s. Buying stocks from them was kind of like
    stepping into a ring with a one-legged kick boxer. They’d try their best but there were unmistakable constraints imposed on them that prevented them from succeeding

Everyone described above was trying, but their approaches often caused a dislocation between the stock price and the value of the business. The last 30 years were hard but there were a lot of opportunities to exploit those investors who treated a stock as a piece of paper and not a business. Even if that only happened with 3% to 5% of the universe, it was all you needed to outperform the market.

A friendly animal with no teeth emerges

Over the last 10 years you noticed a new class of investor in the marketplace – the passive index investor. They didn’t care what stock they owned, as long as it was in the index. They were an odd bunch. It was all about exposure to the market for a low fee. They wanted to own every stock in the index which included the good, the bad and the not so pretty ones. That was the only criteria for purchase!

Effortless mediocrity

At first glimpse, it looked like passive investors were putting their faith in no one. They believed the markets were efficient. That there were enough smart people trying to determine the right price for
investments that there were few, if any, mispriced securities. You realized passive investors put their faith in people like you, those who still tried! This allowed them to buy and sell their stocks at fair value without lifting a finger for analysis, trusting in the homework of others. Not necessarily the qualities we want to teach our kids, but for those who chose to follow the path to effortless mediocrity it’s been a free lunch for a few decades.

The group with no questions

The inescapable reality of index investing is that these investors have decided there’s no point trying. That’s why it’s called “passive” investing. Passive investors no longer believe in the importance of
asking questions about the businesses they own.

Questions like:

  • Is it a good company?
  • Is it facing steady decline?
  • Is the accounting clean?
  • Are the earnings overstated?
  • Is management competent?
  • Am I buying it at a dumb price?

None of these questions mattered anymore!

Initially this group flew under the radar, but lately more and more of your transactions are with people who decided it isn’t worth trying! You notice the dislocation between price and value has become a more common occurrence, likely because you’re trading with people who are ignorant to price and value.

Many of your friends become index investors. It’s tempting to follow the herd into this passive investing utopia with low fees and market returns with zero effort. You recognize it would diminish your soul to simply aim for average, so you drive on. You realize that investors buy into the fallacy of the dumb money experiment because they take comfort in assuming that since they own the market, they’ll earn the same return as the market.

Since passive investors don’t ask questions and put their faith in other people to do their work for them, they don’t even bother to think about what the world would look like if passive investors dominated
the investing universe. For example, what will become of market returns if this indexing trend continues and dumb money represents over half the market?

Blind leading the blind

Let’s fast forward to a world where everyone but you has become an index investor. The calamity that
ensues would obviously occur well before only one active manager remains but sometimes it takes going
to an extreme to prove a point.

If there are no other active managers and the passive investors buy and hold, you’d have no trading partners. Passive investors would earn the market return because they aren’t trading. The market return would be determined by no one as there isn’t anybody reliable to set the price. There’s an old idiom about the blind leading the blind that comes to mind in this example.

Awash in dumb money

Luckily, this isn’t how things would pan out for you. Passive investors are rarely ever truly passive so they’d still trade because they won’t be able to escape feelings of fear and greed. And they’d probably reinvest their dividends, continue to save each year for retirement and put that savings into the market. Others would need money and have to sell their stocks. There would also be changes to the composition of the index which would force them to trade. Really only those who hold the index and never trade are truly passive. Each time a passive investor trades is an opportunity that can be exploited.

Let’s assume you know one stock really well. It’s called ABC Company, held in the index and you’ve determined the fair value is $20 per share.

When “investors” decide to add to their retirement savings through their low-fee index fund, they blindly
buy each representative holding in the index. Who determines the price if everyone but you is a passive investor? You’d be the price setter of ABC, but the prices of the remaining stocks in the index will be a crapshoot.

Initially you find it hard to believe that otherwise sophisticated people could be so careless with their money. They don’t ask about the value of a business so you get to determine the buy and sell price. Being the savvy active investor that you are, you’re going to set a price well above $20 when there is more
demand of ABC Company than supply. When there are more passive index sellers of ABC, you can set
your buy price all the way down to $1 if you’d like. The passive indexers have relied on you, and people
like you, for decades to set the fair price. They trust you implicitly! After all, it’s all about getting the proper “exposure” so they can get their “market return” even if it’s not good value.

Though they don’t think for themselves, they still have feelings and will feel the volatility. The proprietors of the index funds would make excuses for the volatility that would sound perfectly logical for most of the non-thinkers.

The profitable facilitator

The herd would look to you to set the price. You’re legally allowed to exploit them. The index manager’s
job is to match the composition of the index for a promised low fee. You’d be the happy facilitator.
Given the example above, the notion that increased index investing shrinks the opportunities for active
managers is absurd.

The fun part of exploitation

If you became well-educated in other names in the index, you’d be able to take advantage of passive investors more often. When they trade, you’d profit solely at their expense. You’d decide how much of their money to take on each trade. The growth of your wealth will be directly proportional to the volume of their trades. If they trade enough, they’d eventually have no money and you’d own the entire market capitalization of the stock market. At that point, would the returns of index funds match the return of the market?

This is what would happen if you were the last active manager. It probably wouldn’t get to that point though because as soon as passive investors started to get heavily exploited, some would start thinking for themselves. They’d cut and run well before this utopian exploitation point.

More dumb money = more opportunity

The example above assumed you were the only active manager. Even if there were two active managers left would you spend your time trying to profit at the expense of the other one? Of course not, you’d both exploit the dumb money. Same scenario if there were three or four active managers in a sea of indexers. With passive index funds purportedly representing 40% of some markets, the supply of dumb money is beginning to reach critical levels for exploitation.

This brings us back to how self-improving individuals can cause self-harming crowds. Each passive investor
thinks they’re doing what’s best for them – investing in a product with low fees while effortlessly achieving market returns. It works if only a minority uses this strategy because they can rely on the majority for proper price discovery. With fewer and fewer active managers determining fair prices, passive investors would increasingly be left having to buy and sell at something other than a fair price. The very people they relied upon when they were a minority would exploit them when they become a majority.

This commentary is intended for our investment partners. We’d appreciate if you’d refrain from forwarding it, as we’d like the momentum behind the dumb money movement to continue.

Geoff MacDonald
Portfolio Manager

Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Please read the prospectus and Fund Facts before investing. Copies are available from your financial advisor or at Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This is not an offer to purchase. Mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale. This document is not intended to provide legal, accounting, tax or specific investment advice. Information contained in this document was obtained from sources believed to be reliable; however, EdgePoint does not assume any responsibility for losses, whether direct, special or consequential, that arise out of the use of this information. Portfolio holdings are subject to change. EdgePoint mutual funds are managed by EdgePoint Investment Group Inc., a related party of EdgePoint Wealth Management Inc. EdgePoint® and Owned and Operated by InvestorsTM are registered trademarks of EdgePoint Investment Group Inc. Published October 11, 2016.

Changes to the Rules for Estates and Wills in Canada

If you are an executor, you have a pretty heavy job ahead of you.  Working with an Estate and Trust planner, can you navigate and eliminate some of the pitfalls.

Recent amendments to the Income Tax Act have made fundamental changes to the tax rules for estates and wills. Lawyer’s , trustees, and financial estate planners should familiarize themselves with the new rules.

A general rule, all income from trusts is taxed at the tip individual tax rate of about 54%. There are a few exceptions to the top tax rate rules.  Currently, the new legislation shifts the tax burden of a spousal trust to the estates of the surviving spouse. Fortunately, however, it appears that these provisions will be cancelled, as discussed later in this update.


Formerly, testamentary trusts were taxed at a graduated rate, the first $40,000 of income was taxed at about 20 percent the next $30,000 at about 32%, and increasing to about 50%when income exceeded $220,000. Effective January 1,2016 , all trusts will be taxed at the top rate of about 54%.


  1. The deceased estate for the first 36 months (this is called the GRE) or Graduated Rate Estate
  2. One trust per year for an individual who qualifies for the Disability tax credit (this is called the Qualified Disability Trust , or QDT)


These rules are complex.  Simplification for the purposes of this piece, means, the accumulated tax savings enjoyed during the QDT qualification period are in essence clawed back, when the disabled individual dies or ceases to quality for the DTC.  In order to realize the savings , the income must be distributed to the disabled beneficiary before the year of death.  Without the assistance of a qualified planner, this could damage the relationship with provincial benefits.  There are some new tax planning tools that can elevate this situation, but in order to be able to take advantage, very detailed planning must take place.

GRE Rules

The graduated estate tax rules are also some what complex.

Firstly, the estate must designate itself as a GRE.  If the estate ceases to qualify as GRE, it losses it status for tax filing purposes.  Consequently, charitable donation credits and deductions for losses of the estate may be lost and the top tax rate will apply.  This can have serious consequences for the estate and in some cases can result in double tax, in particular where shares of a private corporation ae held by an estate.

A GRE, can lose it status before the 36 months if the estate received contributions from persons other than the deceased, including certain loans or loan guarantees made by non-arm’s length persons.


Dual wills for owners of private corporations are now common. The CRA has indicated that it intends to treat what are often referred to as a primary and secondary estates in these dual wills, as on graduated rate estate. As a precaution, it is advisable to address this issue specifically in the will to indicate the intention to direct the estate trustee to designate both estates as being one graduated rate estate. It is also prudent to name the same person as estate trustees of both estates.


In January the Department of Finance introduced draft legislation that effectively cancels new provisions shifting the tax burden on the death of a surviving spouse from a spousal trust to the surviving spouse’s estate.  This in effect , leaves the beneficiaries of the spousal trust with the tax burden.

There are some very interesting estate and tax regimes that can help with the complexity set out in the different issues.  There is no getting away from paying tax, but there are good planning strategies that can defer and minimize the burden on the surviving executors and trustees.

Debbie Hartzman
Debbie Hartzman.CFP.CLU.CDFA.TEP.RRC
Professional Investments

Volatility is Your Friend

From August 1982 to August 1987 the stock market staged a phenomenal 250% increase.  Then in one day in October 1987, the market dropped a record 24%.  Sanity and reality returned.  That’s the stock market.

Over the last 70 years we have had many bull markets (Up) and also many bear markets (Down).  But guess what?  The bull markets averaged going up about 100% and the bear markets on average, declined 30%.  Not only that, the typical bull market lost 3 ¾ years and the classic bear market lingered about 9 months.  Viewed with perspective, that’s a terrific deal.

For more than 100 years, the market has recovered every single time.  It ultimately soared into new high ground.

What causes this continual long-term growth and upward progress?  It is one of the greatest success stories in the world.

The stock market does not go up due to greed; it goes up because of new products, new services, and new inventions, and there are hundreds every year.  The innovative entrepreneurial companies with the best quality new products that serve people’s needs will always be the things that make the stock market higher over the years ahead.

The short-term volatility of the market (bear markets), always create opportunity to take advantage of the next leg up in the market.  In that way volatility is our friend.

Paul Fisher

Volatility as Opportunity

Volatility gets a bum rap in the financial services industry. For the average investor, it’s synonymous with risk and you’ll often see the two terms used interchangeably. Nor is volatility’s reputation entirely unfounded. Certainly over a short time horizon, a tumultuous market can have real consequences if you need to buy or sell an investment. In that case, what might be merely volatile for another investor is downright risky for you. However, volatility isn’t an effective measure of long-term risk.

“Wisdom” regarding volatility

Commonly represented by standard deviation in finance, volatility is a statistical measure of up and down price fluctuations over time. Investments with rapid, dramatic price swings are considered highly volatile. Those with consistent prices are considered to have low volatility. The formula for standard deviation treats all volatility the same. It tells you how much results have deviated from their historical average, whether above or below it. Thus, an investment with nothing but positive returns can nevertheless have high volatility if those results have varied from slightly positive to massively so. Put simply, volatility measures how a stock trades and not necessarily how much business risk it holds.

Consider the following example. Company A isn’t volatile but provides a false sense of security as over time, its stock price has steadily declined to near zero. On the other hand, Company B – while chock full of short-term price variability (uncertainty) – is trending higher in the long run.


The heart of the matter

What’s at the root of these up and down price movements anyway? Volatility can be a sign of market participants acting emotionally rather than rationally. History proves that in the short term, stock markets don’t operate so much on mathematical principles as they do on behavioural psychology. The tech bubble is an obvious example of emotions overtaking investors’ common sense. In recent memory, escalating sovereign debt crisis unnerved markets the world over and sent volatility soaring once again.

It can be a vicious circle. Investors react to short-term “noise” from the likes of salacious newspaper headlines and opinionated industry pundits, and buy or sell stocks on emotion. Investors then react to those market movements, creating – you guessed it – greater volatility. As illustrated in the example below, far too often the greatest risk investors face isn’t from external forces but rather their own harmful behaviour.

Investors behaving badly

Those rattled by volatility who shift in and out of the market tend to have poor timing. This graph shows how the average investor has historically received a fraction of index-based returns from buying and selling stocks at inopportune times.

20-year annualized returns by asset class


(1994 to 2014)

Source: JP Morgan, Bloomberg. Bonds: Barclays Capital U.S. Aggregate Bond Index; Oil: Bloomberg WTI Cushing Crude; Homes: S&P/Case Schiller U.S. Home Price Index; Inflation: U.S. Consumer Price Index; Investor returns: Calculated using Dalbar fund flow information. All returns annualized and in US$.

A different definition of risk

Lower volatility doesn’t necessarily make an investment safer. Likewise, an investment can be volatile without being risky. That’s why seasoned investors don’t view volatility as risk. Rather, risk should be viewed as the possibility for a permanent loss of capital. In other words, a stock goes down in price and stays down for a long time or even forever. Historically, such an event has coincided with times of consensus thinking. For example, in the 1980s, investors believed that the Japanese management style was superior. Copying it was in vogue because the Japanese knew how to run businesses. If you invested in line with this theory and bought into the Nikkei Index, you’d still be down today.

Fast forward to the 1990s, when the crowd said that emerging economies like Mexico would always grow the swiftest. That changed mid-decade with the 1994 Tequila Crisis. By 1998, emerging markets from Russia to Southeast Asia had virtually collapsed.

The dot-com bubble that came next saw investors latch on to the false promise of sustained explosive growth from internet-based companies. These unrealistic expectations fueled “irrational exuberance” in the market. When the bubble burst, billions of dollars simply evaporated along with it.

And not too long ago investors lost vast sums in the 2008 financial crisis in part because they mistakenly believed that real estate could only go up in value because everyone said it would.

Each of these instances resulted in a permanent loss of capital as those who followed consensus haven’t yet recouped their money. Accordingly, it’s more prudent to adopt an old-fashioned view of risk that asks, “How much money can I lose and what’s the probability of that loss?”

Real risk has to do with factors that can go wrong with the underlying fundamentals of an investment. For that reason, thoroughly understanding a business is a far better form of risk control than focusing on a stock’s past price behaviour.

Say 100 people are asked to price a new pickup truck. Most will accurately peg the truck’s value at between $25,000 and $45,000. Now, say those 100 people are offered the truck for $200. Surely all will accept and lose no sleep thinking they overpaid.

Imagine the same 100 people are asked whether a publicly traded company is worth $50, $100 or $300 a share. No doubt few will have any idea of its worth. What if that company’s share price falls on negative macroeconomic headlines that have no impact on the business’s underlying value? Most likely almost everyone will rush to sell their shares. When you don’t know the value of what you own, there’s almost nothing as uncomfortable as watching its price plummet.

That’s why its investors’ job to know a business’s value so they can take advantage of those who don’t. It requires staying focused on company-specific risk such as increased competition and margin contraction, management competence and the valuation of a business relative to its true potential. Following this approach puts investors in a better position to make good decisions in the face of volatility.

Harnessing volatility

Now for a real-world example of how share price movements in the short term can bear little resemblance to a business’s long-term operations. The graph that follows compares the annual earnings of a dominant U.S. health insurer to the company’s stock gyrations over the same timeframe. Notice that while earnings consistently increased, the share price was nevertheless quite volatile. However, that volatility was rarely due to factors in the underlying business. As Ben Graham liked to say, “In the short run the market is a voting machine but in the long run it’s a weighing machine.” In time, the divergence between share price and business value tends to disappear as investors come to recognize a company’s true worth. What happens in the short term is anyone’s guess. But knowing that you own a piece of a business – and not just a stock – should keep your investments on track and provide peace of mind during volatile periods.

Stock price volatility in action


Source: Bloomberg LP. As at December 31, 2014.

  1. Company acquires a competitor for an undisclosed amount.
  2. Company increases stock repurchase program to authorize future purchases.
  3. Insurance cancellation scandal widens and company sued for illegally denying coverage.
  4. CFO fired.
  5. Company announces strong 2008 outlook. Its leading market position is expected to continue generating good growth and enhanced value.
  6. U.S. health insurers “moving towards an oligopoly.”
  7. Stock repurchase approved, but investors prefer increased dividend.
  8. Macroeconomic fears spread about the European debt crisis and concerns over France’s AAA rating.
  9. Supreme Court upholds Obamacare as constitutional.
  10. Company announces plans to replace its CEO.
  11. New CEO named.
  12. Company acquired.

To recap, volatility shouldn’t be viewed as risk. It may feel like it but in reality, it doesn’t represent risk in the true sense. True risk is the opportunity for a permanent loss of capital.

Written by Rebecca Jan in collaboration with Tye Bousada, Sayuri Childs and Geoff MacDonald.

The above company was selected for illustrative purposes and is not intended to provide investment advice. EdgePoint Investment Group may be buying or selling positions in the above security. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Please read the prospectus before investing. Copies are available from your financial advisor or at Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This is not an offer to purchase. Mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale. This document is not intended to provide legal, accounting, tax or specific investment advice. Information contained in this document was obtained from sources believed to be reliable; however, EdgePoint does not assume any


Risk and Volatility

Financial Planning Most Overworked & Misunderstood Words

Is it Risk or Is it Volatility?


Risk is defined as a probability or threat of damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities that may be avoided through premature action.

Investment Risk is defined as the probability of loss associated with an investment objective.

Fluctuation is defined as the relative rate of which the price of an investment moves up and down. If the price of an investment moves rapidly over short periods of time it has high volatility. If the price almost never changes if has low volatility.

Investment Risk can be attributed to about 7 different causes. Those being Market Risk, Inflation Risk, Interest Rate risk, Liquidity Risk, Marketability Risk, Time Risk, Financial Risk or Default Risk.

The financial services industry media & most advisors tend to ignore the foregoing real risks & mistakenly focus on volatility.  They refer to it as risk, thus creating unnecessary investor anxiety.

Fluctuation on the other hand isn’t loss, its oxygen. With oxygen you will live, and make money without it you will die. Investments that cannot fluctuate are not investments they are savings. The long term return on savings after inflation & taxes is always near zero or less.

Fluctuation only becomes a loss if you panic & sell – thus the risk. Markets don’t lose money for people, people lose money for themselves. To ensure a successful investment plan with the goal of creating wealth there are a few tips to follow:

  1. Tune out the media noise. It is all focused on the immediate & is destructive to positive long term results.
  2. Let volatility or fluctuation be your friend, use it to your advantage.
  3. Don’t buy what you want to buy for the moment but rather buy what you need to buy for the rest of your life.
  4. Have faith. Hire professionals & let them work on your behalf.

For more information or discussion do not hesitate to contact Gordon French at Professional Investments 1-888-548-8868 or

Important Reminders About Market Corrections

It has been a while since the markets have had a meaningful correction.  Over the last 3 years the only meaningful pull back was last fall when the S&P 500 dropped from 2.011 to 1,862; a little over 7% decline.

Most Money Managers would welcome a nice pull back so they could invest a few more dollars into their most favorite companies.  They would love to pick up a bargain.  As volatility returns to the market; as it most certainly will, there are 7 things investors should remember:

1)   Stick with your long-term plan (Short-term market fluctuations should not be a concern when you have a sound financial plan.

2)   Look beyond today’s markets (No one can predict what the market will do or when, so think of it as a store-prices increase when demand is high and drops when demand is low.  The long-term trend is upward).

3)   Don’t let media headlines distract you from your plan (The media focuses on “Now” and not the long-term).

4)   Avoid chasing the latest trends (Jumping from one investment to another can hurt your long-term performance).

5)   Accredited professionals are the best managers (Your portfolio is diversified among a number of investments, and managed by highly qualified portfolio managers).

6)   If your objectives have not changed, neither should your investments (The investments in your portfolio were chosen because they were compatible with your long-term goals).

7)   Volatility is the friend of the long-term investor (Market will offer up great bargains from time to time allowing a portfolio manager to add to some of his best investment to create a great long-term return).

So, again as volatility returns, remember your goals, and don’t let short-term events cause you to disrupt your long-term plans.

Paul Fisher – CFP

Put Money in Your Pocket – Your Credit

As an advisor I help people in many areas of their financial picture.  One area that I have a strong focus on is debt and credit due to my additional activities as a mortgage agent.

We often get caught up focusing on the short-term, such as payments we have to make this week, next month or on something we are going to buy soon.  By thinking longer-term about our goals we can have more for less.  Giving up a little today can pay off in a big way down the road.  That may be in various ways, such as through tax savings, compound growth or the way we maintain our credit.  Today the focus will be on credit.  Building and maintaining our credit can pay off very well over the long-term.   Lenders will give us better terms and interest rates if we have great credit, which can mean substantial savings.  The reverse of this is that if we let our credit slide, the long-term costs can be overwhelming.  Read on to see how your credit score is calculated and by extension what you can do to save yourself money down the road.

I often get questions about credit scoring, ‘Why is my credit poor?’, ‘How do I keep and/or improve my credit?’ and ‘What is an R3?’ are just a few examples.

Many of us are at least concerned about what condition our credit is in.  Most of us have some idea of what our credit is like, however the rules that guide the checks and balances that determine a credit score are not always immediately apparent.  In this short article I am going to outline some of the more common mistakes that I see clients make in my daily dealings with mortgage and investment clients.   Many times the mistakes are innocent.  Innocent or not, credit reporting agencies for the most part don’t care, therefore each blemish shows up on your credit report.  The industry has determined that one of the best indicators of a borrower’s propensity to repay a loan is how well they repaid in the past.   This is one of the more significant facets represented in your credit score.  You’re probably not overwhelmingly surprised by this, but there is more, if you’re still interested read on.

Most people are familiar with the term Beacon score, this term came from Canada’s largest credit reporting agency, Equifax.   Equifax produces a score that ranges between 300 and 900 points, the more points you get the better off you will be.  It is based on a number of criteria.  Some of these criteria are out of your control, such as your age, marital status, number of children and address, to name a few, all of which may indicate varying levels of stability, ability to work or length of time your credit has been established.  It is worth noting that a score of 680 or greater generally provides you with very good borrowing options, above 750 will open doors to the best financing available.  The difference between having a score below 680 and above 680 can be thousands of dollars of interest costs on your next mortgage or other debt.  There are a number of criteria that you can affect.  Here are some tips on keeping your score above 680.

Not paying within 30 days

Repayment history is one of the most significant factors, accounting for around 35% of your score.  Lenders like to be repaid on time, if they are not repaid on time they let all other lenders know via credit reporting agencies, thereby negatively affecting your score and hampering your ability to borrow money in the future.  To keep your payment history in top shape, all you need to do is make minimum payments by the date specified on your statement.

Ignoring small balances

I have often seen people ignore a small balance on a ‘big box store’ card, the minimum payment may only be $10, missing that payment will give you an ‘R2’ (meaning you paid within 60 days), if you do not pay within 60 days you will get an ‘R3’ and so on.  The ‘R’ stands for revolving, like a Line of Credit or a credit card, ‘I’ for instance stands for instalment, this would be a car loan or a personal loan amortized and paid down over a specified period.  The number beside ‘I’ or ‘R’ represents how long it took to make the minimum payment.  A three for instance means you paid within 90 days.  You do not want R3s.  Missing minimum payments on small balances can be very damaging to your credit score.

Leaving balances over or near the limit

Level of indebtedness also makes up a significant portion of your score, approximately 30%.  If you are already ‘maxed out’ your score will be lower indicating to lenders that you should not be lent more money.  Keeping balances at or near limits particularly where high rates of interest are charged indicates mismanagement of your credit.  Keep balances well below the limits, 60% of your credit limit is good target to stay under.  You can use your high limit to make a purchase but should try to reduce the balance to 60% of the limit within a short time period.

Multiple credit reports

I have often had the question, if you check my credit, will my score go down?  It is true that multiple credit reports can negatively impact your credit score, however the purpose of that scoring metric is to target credit seekers, not someone who is going to a couple of places looking for a mortgage.  A credit seeker is essentially someone who is going from place to place trying to get multiple credit cards or other credit over a short period of time.  This is considered risky and unpredictable by credit agencies and naturally will be reflected in that person’s credit score.

Having no credit is not good.  Having bad credit can be worse.

I have heard that bad credit is better than no credit.  This is all relative.  If your credit is so poor it is irreparable for a number of years, I think I would rather be starting from scratch.  With that said it is important to have credit.  Typically two credit streams over a couple years time span is usually the minimum that lenders would like to see (usage of two credit cards for example).  You can be rejected for a loan because you have no credit.  If you are thinking that sounds like a vicious cycle you would be right.  How do you get credit if you don’t have any?  You usually start small, department store cards are the easiest to get.  Once you have one, use it conservatively, wait for the statement, and then pay it.  If you pay off the card before the lender has reported to the credit reporting agency they will report nothing and you will not build credit, hence the reason for waiting for the statement before paying off.

Although I have not covered all the factors that make up a persons credit score I believe this article covers the common ‘trip ups’ that people experience as well as the bulk of what makes up a persons credit score.  The potential short-term pitfalls listed in this article can have long-term impacts that can take years to fix and cost you valuable time and higher interest costs while you rebuild.  Keep shopping, but keep these tips in mind.

Chris Grypma
Advisor and Mortgage Agent
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