The Mindset of a Successful Investor - Part 2 : Ross Grant
Victory awaits him who has everything in order - luck people call it. Defeat is certain for him who has neglected to take the necessary precautions in time - this is called bad luck." - Roald Amundsen, The South Pole.
I like to keep blog posts short and sweet, since anyone who visits and reads this blog has given it their most valuable resource, the only one that once gone never comes back: time. I hope I show my appreciation well by saying a lot in a few words.
But this blog post is different. I was lucky enough to meet one of my investment heroes, Ross Grant, who was happy to share his thoughts in an interview for Plutus' Normative.
Our conversation was free flowing, the best kind of conversation to have with someone I've looked up to for so long. His excellent book was the manual for my own investing.
It seems appropriate that this blog post reflects our free-flowing conversation. Ross' answers have been modified/paraphrased for clarity, and he had the chance to review the final draft before publishing.
PART 1: THE END:
1. Let's start at the end: How's 'retirement treating you?
I'm loving it. I'm pretty active, so I like cycling, swimming, and I'm learning how to play golf (which is not going well). I'm a bit of a handyman as well, so I spend a lot of time fixing things around the house: things you would normally call a repairman for. I either already know how to do it, or I'll give myself a chance to figure out how to do it.
I also spend a lot of time investing, or rather, monitoring what's going on in the world. It's not doing much, but it tells me whether I should be doing something or not. I also spend a lot of time on portfolio management, which takes up far more time than actually investing. It includes paperwork, minimizing taxes, etc. None of this stuff really generates much return on your portfolio.
I would argue that this monitoring and portfolio management does generate return. If you look at some of the most successful investors like Warren Buffet, and ask them what they do everyday, they have a very simple answer: just read. All the information they absorb helps them make their minds up about what they should buy/sell. So it sounds like you're emulating successful investors.
Yes. One thing I do read a lot of is people trying to predict the future. A huge percentage of the articles are like that. Unfortunately no one knows the future, but you'd like to think that someone would have a glimmer or glimpse into it. If I recognize an article like that, then I try and take stock of what the article is trying to tell the world. But other than that I don't place too much value in them. There's so much noise, that's the problem. The better filter you can develop the more comfortable you'll be.
Has being physically active helped you in retirement? Was that a feature in your life prior to retirement, or did you find that you when didn't have work you had to find something to do?
I have come across a lot of people for whom retirement is a real change. When I was working I always enjoyed my job but my mind was often thinking about what to do after work, what to do on weekends, about vacations, etc. There was so much stuff to do in this world, and I wanted to do those things. So when I retired I felt like I could finally do all the things I always wanted, as opposed to some other people who go: what do I do now? That's tough.
2. I will hazard a guess that you feel, much like myself, that 'retirement' is an inapt word to describe what is now more commonly becoming known as 'financial freedom'?
Retirement was viewed as what people do in the last years of their life, where they're on a beach or a porch, and they can't really do that much. And now, there is this new term called financial freedom which more aptly describes the situation people aspire to. In retrospect, people could be retired and in the ditch so to speak. Financial freedom definitely sounds cooler.
In reality there are certain things that I 'retired' from: I retired from my alarm clock, I retired from having work assignments that somebody else thought was a good idea to do so we could get a certain metric by the end of certain quarter, I retired from performance reviews.
Do you think that word, 'financial freedom', is going to stick the way 'retirement' has stuck?
I think the 'retirement' is definitely going to retire at some point. I think financial freedom is a cool terminology but I think it's almost too much for most people to be pursuing it. There's so many steps you have to take to get there.
The one thing I noticed exploded after the financial crisis, especially in the USA, is that people came to the realization that they might not retire at all. So what you see happening is people saying: how can we twist this to be cool? So now you have things like 'working retirement', or it's a 'phased-in retirement', where people are still working to have some income coming in, but it's not the same as before. We will see over time how that plays out.
If I tried to describe this concept to my peers (millennials), and given how millennials have struggled recently especially after the financial crisis, it doesn't come across something that has a positive tone to it. People look at you and say: who do you think you are, 'financially free'? I think this phrase will change, since who wants to be associated with something negative?
This isn't exactly directly related to this question, but I grew up in a world without internet. So I've seen it go from no internet to internet everywhere. And the internet is really cool. In 20 years from now the world will look very different because of it and it will create different opportunities for people as well different lifestyles. We just have to see how it plays out.
3. Everyone's experience of financial freedom is different, but are there any cons to it for you? Can't be all sunshine and roses, or is it?
That's a really good question. There's only really one, and it's a pretty big one: you're the CEO of you, so the buck stops here. If I screw up my investing, I'm going to suffer. There's going to be no paycheck coming in every two weeks that is going to subsidize. And there's a stress with that.
It's not bad since I'm used to managing my own finances and investing, but if you weren't used to it then it would be very stressful.
How do you deal with that stress? Tell me what goes on in your head, what kind of thoughts go through your head?
I could see this problem coming before I was going to retire, and it simply came down to: where is my income going to come from, how do I get it? And my thought was that I'll make sure that I have a year's worth of salary on Jan 1 in the bank. So at least I'm good for 12 months.
But then I quickly realized that this was quite a large sum of money to be sitting in my chequing account, so I decided to go every quarter and collect the funds. And pay myself a third of that every month to myself, so it feels like a salary. In fact, I go to the bank every two weeks and take some cash out of my account just like I used to do every payday when I was working. I mimic the salary receiving world that I was used to, and that's very comforting.
That's really smart! It's exactly what immigrants do when they make home in a new country, is to replicate the best from their old lives.
Someday I'll put that in a book in more detail perhaps, because some of these little details that take a while to figure out are the most important. They should be shared.
PART 2: THE BEGINNING:
4. Having talked about the end, let’s go to the very beginning: What happened to bring about this quest of yours for financial freedom? A specific event or an incident?
When I graduated from engineering I had one job offer in Toronto as a Data Network Planner, which was not a good job for an electrical engineer. But I was thrilled to get it, so off to Toronto I went.
It involved a lot of paper-pushing, and just really was not a good fit. After one particularly bad day where my boss' boss yelled at me, I came home and thought: what would it take to not have to work? So I sat down on my computer on my excel spreadsheet and a couple of hours later I had a potential plan of how much I would have to save for how long to have enough to live on till I passed away. It was very crude, with none of the inputs I have today, but I thought to myself: I can do this! So that's how it all started.
How'd you feel in that moment? Was it a moment of liberation where you're relieved or were you still doubtful and unsure...?
There were a lot of inputs that were guesses, but my mathematical brain said: hmmm, there's answer to this, it is possible. It got incredibly refined over the next 30 years, but the basics didn't change much.
I made up a couple of mathematical models in a spreadsheet a couple of years later that were very similar to the first one, but at the end of the day it's a very simple compound interest formula; it's grade 9 math.
5. Behavioral science tells us that a sense of purpose is a far greater motivator than just the rewards themselves. How did you see financial freedom fitting into this framework?
Well, I don't know about a sense of purpose, but I certainly knew what I wanted. I knew I wanted more time for myself to personally do whatever I wanted to do. And I needed some income coming in to do those things. And that was my vision: spending more of my life doing more of the things that brought me more joy.
Mathematically I could see that if I was lucky I was going to get 80 years (that's what the stats say), and not to be morbid, but 80 years is after all an average. If you get to live to be 80 years, half the people have already passed on and half the people are going to live a little longer.
That's a really subtle point that doesn't get appreciated much..
There was another funny event that drove me to all of this, which was when I snuck into a retirement course at work when I was in my late 30s. I think they had some layoffs coming up and there were going to be some packages offered to some older folks, and this educational seminar was part of it. And this was when I was 3 or 4 years away from retirement.
They showed this chart about a study about how well males in a certain age group had done after retirement over a period of time. For every 10 males they had looked at, 3 of them didn't make it to retirement. And then they went on to tell you what happened to the other 7: one guy did really well, some of the others reasonably well, and so on.
But I barely heard any of it; I got hung up on the 3 that hadn't made it to retirement! I said to myself: I've got to get out of here as fast as I can so that my odds of being in the 7 that do make it to retirement are higher! I checked the statistics recently, and I think it's up to 85% of people now live to be 65 or older. But that still means that 15% of the population doesn't make it to retirement! I don't fancy being in that group. So I prefer to hedge my bets and perhaps have a little less money, but a lot more time.
6. Tell me about discovering the BTSX strategy. Was it something you connected with instantly? Or did you have to mull over it for weeks/months/years?
That's a really good question. I first started reading about David's BTSX strategy probably when he started publishing it. I read it for about 5 years, and during that time I was buying individual stocks without and rhyme or reason. I also had no plan as to when I was going to sell them. Sometimes I had good returns, sometimes not, but no real consistency.
But with the BTSX strategy there was a clear list of 10 stocks, you had a protocol for selling them, reviewing them and a clear rationale for replacing them. Along the way you earned income through dividends, and the data indicated that over the long-term those stocks did very well.
So it definitely wasn't a lightbulb moment.
No. And that's what I try and promote about the BTSX strategy too, that the BTSX strategy is no lightbulb scheme: you won't be a millionaire next year, but if you're patient and stick with it for 15 or 20 years you'll definitely be a millionaire.
That's so weird to me. For me it was definitely a lightbulb moment. It was like a discovering a groomed trail in the backcountry bush, and that you could walk it and know that you could come out the other end at your destination unscathed...How old were you when you came across it?
I was in my early 30s.
I came across it in my early 20s. Perhaps it's an age related thing. I remember being so energized by it, like I had struck gold. I remember I was so energized that just wanted to go play high-intensity sports, and I think I did 50 or 60 pushups in my room just to burn the energy off. But it took me a while to dip my toes into it, which leads me to my next question!
PART 3: STAYING THE COURSE:
7. So, you’ve decided to dip your toes into the BTSX strategy. I’d like to hear about that first buying experience. What were your expectations, and did you find that you had to adjust them to the results you saw?
Ya, most people dip their toes in slowly, maybe they'll buy a few stocks at first. What I did was take $25,000 and put $2,500 in each of the 10 stocks in the BTSX list. And then I waited six months and did the same thing again. As the years went on I kept adding to it.
So you built up to it. Smart! My experience was different: I read about it for so long and built up such a large cash position that eventually there was a breaking point where I realized I could have accomplished so much more by consistently buying the BTSX stocks.
The caution I add is that this is a long-term strategy. Last year was a particularly great year, some years aren't. It's only after sticking with it year over year is that you see the results. And even if you forget how much the BTSX strategy beats the index by, you're still getting the income from the dividends. That helps when during the not-so-good years, because it's really tough in a bear market to sell your high performer that is down by 30% to end up buying something that has gone down by 45%.
Someone like yourself who's young and started investing in the bull market that we've had now for 8 years, you haven't experienced it yet.
8. Since we're talking about the bad times, tell me about them: the recessions, market bubbles, etc. and weathering them out.
One thing I'll say I haven't lived through is when the mortgage rates were 25%, but I do feel I've seen a lot by now. A noteworthy one is October 19, 1987 which is known as Black Monday, where the DOW Jones dropped 20% in a single day and I'd only been working for a year. I only had $5,000 invested at the time, but those were all my savings and I was down by $1,000. I didn't sell anything and it all recovered by the next year, so I survived that by hanging in there.
The most recent one is the financial crisis, which was quite interesting. I waited till the market had dropped by 20% before I started to buy some stocks. I thought: a 20% sale is a great deal! Then the market dropped by another 20%, and I bought less the more it went down, getting more and more nervous.
But by the time the market dropped by 50%, I was definitely nervous. But then it occurred to me that this would be a great time to buy if I had a lot of cash. Well, all the cash I had was in the market now through my buying spree as the market went down. So i just decided to leave it there. And as the market recovered my portfolio tripled in value. So hanging in there ended up being the right move.
9. I’ve found over time that consistency and persistence seems to be common traits among successful investors, which mostly translates into sticking to a plan. It definitely sounds like you made fair use of such traits. Did these come naturally for you or did you have to culture them? Could you talk about how you cultured these traits? How would you advise someone who is perhaps not confident in these traits so common to success? As sport psychologists say: if it was so easy then why doesn't everyone do it?
That's a great point. It comes naturally to me, and I'm lucky to have it that way.
Having said that I have to recognize that a lot of people aren't that way. I thought if I promoted financial planning and told people all the steps to retirement and laid it out for them, that they would just do it. But that's not the case. So the question becomes: how do you help them?
I don't have a real good answer for this, except trying to highlight to them what they will achieve if they stick to a plan, and what the outcome would be if they didn't. I think that would be a motivator, but I realize that it's more difficult than it appears.
If I look back to my childhood, in a lot of aspects I lacked confidence in some of the things I was trying to attempt. So my thought process was: if I plan around this, maybe I'll have better chances of succeeding in whatever.
It's funny, lack of "success" in one area of your life led to success in another. So you learnt from your weaknesses.
Definitely.
PART 4: BTSX SPECIFIC QUESTIONS:
10. You often see the statement ‘historical performance is not an indicator of future results’ in investment prospectuses. What do you think about BTSX’s future?
What I try and really avoid in general is to predict the direction of the markets. It's mostly because I've tried in the past and utterly failed.
But what I do try an do is to get a sense of where the market is at. So for e.g. are we in a bull market, or are we near record lows, and those are rough indicators of where you stand. Right now, we are in a bull market that has been going for a long time, too long maybe, but I'm not complaining. And I'm not going to go and sell all of my stocks since we're at a high, because I don't know the future.
I think the key is to be prepared for a bad future, and maybe a good future too. So, most of the time I'm fully invested, 90% in equities and 10% cash. And the cash allows me to take advantage of a poor market that will inevitably come. It really comes down to your mindset: what is your plan of attack when that buyer's market comes around?
So how will the BTSX do in the future? Hopefully OK, we will see. We have 30 years of very good results so far, and if it doesn't do well than we'll have to try something else.
11. We hear a lot nowadays about the limitations of the Canadian market, and how easy it can be to come to hold just three major sectors: financials, energy and materials. Do you have any concerns about diversification if just holding Canadian stocks? Would you suggest a BTSX/BDOW strategy employed in conjunction?
I get this question a lot. First of all, I want to address this idea of diversification. Very often, financial planners use this diversification concept against you: they say you should be diversified, and so spread your risk. This, I agree with.
But then at some point it starts to get a little crazy. They say, because there is the whole world, we need to invest in the whole world so you're really diversified. But what do I as a retail investor know about investing in India, or Australia? I don't, I'm not at all familiar with it. And this is where of course I would need the help of the financial industry to do that.
Sounds like a convenient problem and not a conflict of interest at all..
I think what we really need to focus on in investing is not in being diversified, but in returns on your money, with as low volatility as you can get. So if you can get 12% a year, then who really cares where it's coming from? It'd better be consistent over a long period of time, because that is when good returns make a difference, but let's not get hung up on the fact that for e.g., none of your money is in Europe.
Diversification is good, but focusing on returns is paramount. You're investing to make money.
I do think you should have a mix between Canada and the USA, and I think I mention in my book that by the time to cover those two countries, your stocks reflect earnings from more than 50% of the countries in the world.
I think this is an excellent point which gets missed a lot.
I read an article the other day where a fella was recommending for international exposure that Americans invest in the S&P 500 ETF. He pointed out that half of the profits of the companies in that group come internationally. It's a very simple way to get international exposure.
No currency risk either..
The currency risk is incredible if you start getting into all the countries around the world! Another thing I get a lot of is that the BTSX list is a little light, perhaps there should be some more stocks in your portfolio? If you take just one stock from the BTSX, let's say Royal Bank. If that's all you had you would have a bank that's involved in international lending, private banking, commercial banking, they sell insurance, they're the largest mutual fund provider in Canada, and they also have real estate. So you'd be diversified in a wide range of businesses. And now you add the other 9 stocks from the BTSX and you end up owning a pretty diversified mix of businesses. Adding the BDOW stocks only adds to that. If you look at GE for e.g., it's like the mutual fund of industrial companies!
12. I loved the fact that you talked about some drawbacks of the BTSX/BDOW strategy in your book. The part that interested me the most was about the strategy being tied to the stock indices of Canada and the US. These countries attract investment from all over the world, but if that changes then it may be time to revisit the strategy. Do you have any ideas about any changes to the BTSX strategy?
The thing is that investing in a country is a lot like investing in a company. So if I'm investing in Canada, I'm saying I believe in Canada Inc. Or USA Inc. for that matter. Because if that group of country is not going to do well long-term, it doesn't matter what you buy you're going to have way more trouble doing well than not. One thing that people don't realize is just how big Canada and USA are relative to their populations. There's so many natural resources here.
Now, would I change anything?
Or rather, when would you change something?
So if the BTSX/BDOW strategies didn't do well in the future, I would look into making some changes. I think the key element to take away from this strategy is that it is made up of dividend-paying stocks, and I would think you would never want to move away from dividend-paying stocks.
The premise behind this is that these are mature companies that have figured out a way to make so much money that they can give some back to their shareholders. You don't really need to understand what they do exactly, but just realize that they have a model that is working. The dividend-paying companies that are increasing their dividends year-over-year are the real jewels.
The only real change I made to David Stanley's system was to eliminate immediately the companies that cut their dividends. And that change has proven it's worth in time, especially over the last 3 years since I've been writing my column in Canadian Money Saver magazine.
Another thing I get a lot is that people say: this strategy is too simple; I need to do more analysis before investing in a company. But I'm convinced: if David Stanley and I said that 'we have this list of companies that we publish every year that's been generated by a supercomputer, and it will yield 12% a year, are you interested?', I'd be drowning in money.
But because I've told them how simple it is, they're as skeptical as can be! I saw a documentary recently about Bernie Madoff, and it talked about how he promised people 10% return each year, and people threw billions at him. The BTSX is getting 12%! His caveat was that he always got 10% regardless of market conditions, ours is an average.
There's something in all of this about human behavior that is funny, but it's also a little sad.
PART 5: FINALE:
13. You have two young daughters, millennials themselves. How was your experience in passing on your experiences in personal finance? Any tips for young parents?
So I'm pleased to say that they've followed in their parents' footsteps in terms of managing money. They're both very astute, and they've been wise with their spending.
A key thing was that we gave them allowances from a young age.
How young?
Gosh, that's a good question... When they knew what money was, that money bought stuff, that's when we gave them an allowance.
I see, that point is probably different for different people.
Yes, but that point is still pretty young. And you try and emphasize the point that this is how much you're going to have over the next two weeks, you could spend some of it and also save some of it. It gets them to appreciate different aspects of money.
When they were probably about 10 or 12, they actually had some savings, I said: you have it in your bank account earning x% interest, and you could get a lot more if you invest in stocks.
I had to explain what a stock was, and that they had profits that they paid out as dividends, which was more than what the bank offered. And I posed the question to them: do you want, for e.g., 1% or 4%? And it clicked that more was better.
So I did the investing for them and paid out their dividends every six months. The dividends were significantly higher than their allowance, and in another six months they would get an even bigger dividend payment, since they used the dividends to buy more stocks. They got the idea.
And you know, they were the best investors because they didn't read the newspapers and they didn't panic about this or that. Even today, every so often they'll say: Dad, it was a bad day in the market. Should we buy?
That's amazing! I've had someone confide in me before that his kids taught him a lot. And that really stuck with me. You tend to think of kids as needing to be taught all these things so that they can go off and be adults in the world someday, but it's actually the other way around isn't it?
That's true. I had my kids just before I became a manager at work. And teaching my kids made me a way better manager.
That's hilarious!
The other thing I say with kids is just don't spoil them. If your daughter has 8 dolls, well, maybe 8 is enough and you don't need 30.
14. How would you advise someone looking to pursue financial independence today, regardless of whether they were a DIY investor or looking to get their wealth professionally managed?
So first, you need to have money to invest. To do that you have to live below your means, as my mother used to say. Have some savings so you can learn how to invest. Review your finances regularly. Continually increase your financial knowledge, which is always an ongoing project.
And I always say that the three most important things you need when investing for yourself is interest, time, and some skills. And if you're missing one of those, you cannot do it yourself. Then you may as well hand it over to a money manager.
The skills just imply the ability to keep records of your sales in an excel spreadsheet, and do your tax returns yourself and understand them. Doing your own taxes means using an application like TurboTax, inputting the numbers yourself and understanding the impact what different investments have on your finances.
Is this what you would have told yourself when you were first starting out, all those years ago?
I would have to say that I did those things pretty naturally, so I was lucky.
Have you thought about how things would be different if perhaps you hadn't been as successful as you've been in your investing?
I can't even imagine it, because my engineering mind is always going: how do I improve this? So I think you could put me in a ditch anywhere financially and my reaction would be: well, how do I get out of this? It would just be a detour to the eventual destination of retirement.
And that's just a mental thing? As in that's how you think?
Yes.
That's amazing. I feel that of all the things that we've talked about, that is your biggest strength, is that you think that way.
I find that a lot of engineers think that way. For e.g., the car breaks down, so what do we do about it? Try this, or that, or talk to this person, or that person, until problem solved.
15. Finally, what do you say to people who criticize living frugally?
The reason I ask you this is because I have these two friends who are great with money. But their attitudes towards money are very different. One friend is very careful, he's what you would call a saver. The other one is a spender. And it's funny how this works, is because the one who saves always has money because he saves, and the one who spends always concerns himself with generating the cash flow to spend. And because of this they're both financially well off. The spender obviously criticizes living frugally.
I'd have to say I'm more in the saver camp, but I do see the generation of a large amount a cash flow as a possible solution to being financially well off.
The only thing I have to say to the spender fellow is that he needs to create a portfolio that is many times bigger than the saver's. And it's not in his nature to accumulate the savings he needs for a large portfolio. So he has those two things against him, which is why you'll see a lot less of the spender kind of people who are financially independent. You'll see more of them working lot later in life.
I used to argue with him a lot to get him to see my point of view, but over time I've come to make peace with it. Everyone is different and if a particular way of doing things doesn't rhyme with your personality then it's surely to cause unhappiness.
Everyone's goals are also different. His might not be financial independence. And if his goal is just to have a lot of cash so he can do x or y, then he's successful. And that's an important thing to recognize.
Yes, I think this message needs to be the big takeaway from this conversation, that you have to do what resonates with you, and if you don't then you'll end up being unhappy despite all the money and success you may have.
With that I'll say thank you so much, it really has been an honor to meet you and speak with you so frankly about so many things.
Yup, it's been lots of fun!
