# 20 Year Returns



## Square Root (Jan 30, 2010)

Heinzl wrote an article about Banks in the G&M today. All of the big 5 acheived total returns of at least 12.5% PER YEAR over the last 20 years. This is much better than the index which includes them. I have seen this analysis going back to 1960 with similar results. Truly amazing, and points out that buy and hold can still work. Needless to say, my portfolio is heavily weighted in banks. Why anyone would pay MF MER's or even ETF fees is surprising given the quality of these securities. Dog track indeed.


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## OptsyEagle (Nov 29, 2009)

All that data has survivorship bias. 20 years ago you could not have known how well the big banks would have survived. They had no more of a chance then Kodak, Yellow Pages or The Hudsons Bay Company. Add the returns over the last 20 years with those 3 added in and you would get a much different result but one more attuned with the problem of having to invest forward into the future as opposed to backwards in the past.


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## Square Root (Jan 30, 2010)

I understand survivor bias but this relates to the index not the 5 banks mentioned as none of the large banks 20 years ago has disappeared. Do you think there is an issue with the 12.5% total return? I agree that past performance is no guarantee of future performance. In my case, I have put my money where my mouth is or probably put my mouth where my money is. In any event, I don't tnink you can dispute that the banks have been good investments over a long time and that they continue to perform quite well despite a lot of commentary to the contrary.


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## andrewf (Mar 1, 2010)

On one hand you say past performance is not indicative of future performance, and then you appeal to the strong past performance of banks.


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## Lephturn (Aug 31, 2009)

It really drives home the point that you are far better off buying shares in the banks than you are putting money in savings or buying their investment products.


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## OptsyEagle (Nov 29, 2009)

My point is that the data is irrelevant. So I told you the performance over the last 20 years, of only investing in tech stocks whose names are associated with some kind of fruit, was outstanding. What help does that give you when you need to invest for the NEXT 20 years. None. You don't get the foresight of omitting all the bad investments that looked like good ones at the time, however, your data does.


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## Square Root (Jan 30, 2010)

andrewf said:


> On one hand you say past performance is not indicative of future performance, and then you appeal to the strong past performance of banks.


i said no guarantee. I think it is probably indicative. Or at least I am betting it is.


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## Square Root (Jan 30, 2010)

OptsyEagle said:


> My point is that the data is irrelevant. So I told you the performance over the last 20 years, of only investing in tech stocks whose names are associated with some kind of fruit, was outstanding. What help does that give you when you need to invest for the NEXT 20 years. None. You don't get the foresight of omitting all the bad investments that looked like good ones at the time, however, your data does.


I get your point and it's a reasonable one. My point is the big Canadian banks Have performed very well for a long time. They have beta's less than one, are easily identified, (unlike some obscure post identified tech co), pay solid dividends, earnings multiples around 10x, and are stocks that I have owned for 15 years. They have an extraordinarily strong domestic business model that earns ROE's of over 40%. These facts were known 15 years ago. They are exceptionally well managed as indicated by how they performed during the financial crises. These are not obscure start up companies that in hindsight you can leverage survivor bias. It seems to me that people are always looking for reasons not to buy them. Anyway, maybe I'm biased but my bias has been paying me quite well.


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## OptsyEagle (Nov 29, 2009)

Square Root said:


> I get your point and it's a reasonable one. My point is the big Canadian banks Have performed very well for a long time. They have beta's less than one, are easily identified, (unlike some obscure post identified tech co), pay solid dividends, earnings multiples around 10x, and are stocks that I have owned for 15 years. They have an extraordinarily strong domestic business model that earns ROE's of over 40%. These facts were known 15 years ago. They are exceptionally well managed as indicated by how they performed during the financial crises. These are not obscure start up companies that in hindsight you can leverage survivor bias. It seems to me that people are always looking for reasons not to buy them. Anyway, maybe I'm biased but my bias has been paying me quite well.


Almost everything you said, could have been said about Canadian insurance companies before 2007. A lot of good that did investors. Anyway, I own banks as well, but I have learned that past performance, if anything, is more indicative of reverting to the mean, then it is to continuing on.

My guess is that one would do better, over the next 20 years, buying Manulife, Sun Life and Great West Life, then they will buying Scotiabank, TD and the Royal Bank of Canada...and you will still get your dividends.


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## Barwelle (Feb 23, 2011)

Lephturn said:


> It really drives home the point that you are far better off buying shares in the banks than you are putting money in savings or buying their investment products.


I wonder if it would be fair to say that banks can't expect to make the same gains anymore. With the internet (forums like this, finance blogs, etc) people are waking up to the fees that they're paying and don't have to pay. ETF's are providing a lower cost alternative that take away market share from their mutual funds. Online banks compete with high-fee, low interest traditional bank accounts. Discount brokerages provide cheaper alternatives for DIY investors.


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## Square Root (Jan 30, 2010)

eagle- you may be right. As far as the insurance co go, they really only became public co's in 2000, disclosure has been poor and lacks transparency, their business model lacks the barriers to entry that bank branches provide, management has not distinguished themselves, and their brands are simply not as strong. Having said all that they are certainly due for some better performance. 
Incidently I once read a report by BMO NB called something like " Banks, Canadian Castles" In this report the data went back to 1960 and was similar to that citd by Heinzl. At some point, say over 50 years, you have to figure they are doing something rigjt.


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## andrewf (Mar 1, 2010)

There's regulatory overhand on the sector. Ie, if the government ever comes around to the idea of a competitive banking sector by relaxing foreign ownership restrictions. Also subsidies in the form of CMHC insurance and implicit backstops.


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## Square Root (Jan 30, 2010)

Barwelle said:


> I wonder if it would be fair to say that banks can't expect to make the same gains anymore. With the internet (forums like this, finance blogs, etc) people are waking up to the fees that they're paying and don't have to pay. ETF's are providing a lower cost alternative that take away market share from their mutual funds. Online banks compete with high-fee, low interest traditional bank accounts. Discount brokerages provide cheaper alternatives for DIY investors.


You could say that, but many of these new competitors are owned by the banks or soon will be. I think the banks have shown a remarkable ability to absorb competitors. You may not like it but it certainly has helped their stock returns.


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## Square Root (Jan 30, 2010)

andrewf said:


> There's regulatory overhand on the sector. Ie, if the government ever comes around to the idea of a competitive banking sector by relaxing foreign ownership restrictions. Also subsidies in the form of CMHC insurance and implicit backstops.


Always a risk but there would be a one time bump in stock prices if the ownership restictions were dropped. Cdn gov'ts have been congratulating themselves ever since the financial crises on what a great system we have. I doubt they will change it any time soon. I have come to the conclusion that you may not like the banks, but don't bet against them.


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## CanadianCapitalist (Mar 31, 2009)

Square Root said:


> Why anyone would pay MF MER's or even ETF fees is surprising given the quality of these securities. Dog track indeed.


You cannot simply compare MF/ETF MERs with direct holdings. To make an apples-to-apples comparison, you have to compare total investing costs including trading commissions. With MFs trading commissions are usually 0. With ETFs, an investor will incur trading commissions but the total amount will be much less than commissions for assembling a diversified portfolio of stocks.


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## Square Root (Jan 30, 2010)

CanadianCapitalist said:


> You cannot simply compare MF/ETF MERs with direct holdings. To make an apples-to-apples comparison, you have to compare total investing costs including trading commissions. With MFs trading commissions are usually 0. With ETFs, an investor will incur trading commissions but the total amount will be much less than commissions for assembling a diversified portfolio of stocks.


I guess if you trade a lot. I don't. Probably incur less than $50 per year. That would work out to about .0004%if i did the math right. i guess if you made say 50 trades a year at $10 it would be .004% a far cry from 2.5% or even .5% to MF co or in ETF fees. A lack of confidence or knowledge ends up being very expensive when investing.


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## andrewf (Mar 1, 2010)

Sqrt:

Frankly, your situation is not really relevant to just about anyone else here.


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## Square Root (Jan 30, 2010)

andrewf said:


> Sqrt:
> 
> Frankly, your situation is not really relevant to just about anyone else here.


OK as far as my situation but maybe my experience might be more relevant?


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## humble_pie (Jun 7, 2009)

do let's compare apples to apples.

investor upthread has said that he holds north of 8 figs. What he holds is the size of some small mutual funds or hedge funds, etc. For a stock buy or sell, he might be dealing 2000-5000 shares at a crack. For one low commish less than $10.

this investor might be adjusting his portf roughly 50 times a year. Total "MER" for this investor might run $500 per annum.

now consider what the etf fees would be. Conservatively estimate an average MER of .25 for a small group of standard names. Ouch. Investor would be paying $25,000 in fees alone, for something he could manage while walking the dog.

the difference is mind-boggling at this level, but even for a $1 million portf this difference is glaring. Let us suppose a 7-figure investor holds the same etfs & conducts a like number of trades. He pays the same commish, ie $500 per annum. Meanwhile, etf fees for the same funds would be costing him $2,500. Ouch.

there is another factor that i can't really explain, but for me it is the winning factor. Investors of any size, even holders of $25,000-50,000, will somehow do better by holding 2 or 3 bank stocks outright than by holding XFN. They will do better holding Argonaut's classic 5-pack of hi quality stocks than they will by holding XIU. The deviation will be far greater than any tracking error or any management fee.

one sees this point raised from time to time in cmf forum. One party recently posted that he has started buying individual stocks (apparently emboldened by our racy trading members) & his stock picks are doing better than his etfs.

i can't put an exact finger on what produces the unhappy etf effect. But i see it & i live it, every year. I've held XIU for 11 years. It's managed to creep /from $11 & change to $17 & change. The 2 reasons i keep it are that it's a surrogate bond for me - i don't own any bonds - plus i can eke out some extra $$ selling options against it. Meanwhile my own portf of mostly sedate canadian stocks & option proxies for US stocks has left XIU in the dust. In both cases i'm comparing market values with all intervening incomes, over 11 years, stripped off. Apples to apples.

argo has often posted excellent arguments about this unhappy etf consequence. Argo is no 8-figure investor; he says he's a young person on his first job, busy seeding & building the basics in a small startup portfolio. He's done a great job. Châpeaux.


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## alexei (Jul 2, 2012)

"Almost everything you said, could have been said about Canadian insurance companies before 2007. "

I don't quite understand why many people at the moment have such a low opinion about life insurance companies. In my admittedly subjective opinion, Sunlife and Great West Life (my preference) will do fine in 3-4 years. It will take any Canadian bank 5-6 years to get from 4.5% yield to 5.5% that PWF currently provides. PWF's fundamentals are: P/E = 10.73, beta = 0.87, P/Book = 1.52 - that is very comparable to banks with the exception to profit margins. By that time the prime rate should be restored back to historical average. Whenever oil prices drop, energy stocks drop immediately and that's considered OK. For me it's the same thing for life insurance companies and the interest rates.


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## Ethan (Aug 8, 2010)

I'm on the side of the buy and hold investors. A true buy and hold investor seldom trades and therefore keeps his commissions low, regardless of the size of the portfolio.

As long as banks continue to borrow at a lower rate than they lend, and keep their losses low, banking is a beautiful business. Banking used to be referred to as a 3-6-3 business, that is borrow at 3%, lend at 6%, hit the golf course at 3 pm. The numbers don't apply today but the message remains relevant, banking is essentially a form of interest rate arbitrage. Given the extremely high barriers to entry into Canadian banking, paired with CMHC backing on high loan-to-value mortgages, I'm comfortable allocating a large portion of my portfolio to direct ownership in banks.


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## Mall Guy (Sep 14, 2011)

OptsyEagle said:


> All that data has survivorship bias. 20 years ago you could not have known how well the big banks would have survived. They had no more of a chance then Kodak, Yellow Pages or The Hudsons Bay Company. Add the returns over the last 20 years with those 3 added in and you would get a much different result but one more attuned with the problem of having to invest forward into the future as opposed to backwards in the past.


Well, pretty sure HBC is still in business (and still owns it's real estate), and just sold Zellers for $1.8B, I'm guessing Mr Baker still thinks the return on his $1.3 B for all of HBC is doing okay !


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## andrewf (Mar 1, 2010)

HP, that assumes there is no diversification benefit to a portfolio of ETFs holding thousands of securities vs a portfolio of 20 - 30 individual equities.


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## Belguy (May 24, 2010)

Individual investors getting out of the markets:

http://www.washingtonpost.com/busin...915eee-e7cf-11e1-936a-b801f1abab19_story.html


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## Potato (Apr 3, 2009)

Square Root said:


> I understand survivor bias but this relates to the index not the 5 banks mentioned as none of the large banks 20 years ago has disappeared.


Not the biggest banks, but almost all of the trust companies that existed in 1989 were either taken over or went out of business through the 90's. Unfortunately it's rather tough to find out how big the trust cos were compared to the banks to say how meaningful that was.


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## Lephturn (Aug 31, 2009)

Belguy said:


> Individual investors getting out of the markets:


Investor Sentiment Wheel


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## CanadianCapitalist (Mar 31, 2009)

Potato said:


> Unfortunately it's rather tough to find out how big the trust cos were compared to the banks to say how meaningful that was.


I recall reading an article published in the Globe in 1985 a few months back. The big 5 banks then were the same as the big 5 now. IIRC, the order was different though, TD Bank was #5.


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## Jungle (Feb 17, 2010)

The returns from the banks have been great. What I don't understand is the low P/E ratio right now, ever since the euro problems have persisted, the share prices have failed to come back up (for the most part. )

However profits and dividends are increasing.

I see a lot of people discount is the other things banks are making money on.. international branches + growth of that, wealth management, (big money still) and buying other smaller banks, instead of competing with them. 

I am bullish on banks and probably have too many eggs in those baskets. Maybe not.. total of all portfolios would be 12-16% banks.


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## Jungle (Feb 17, 2010)

Now that Square Root and I are bank lovers, maybe he will let me play with his dividends 
Cheers to todays increases.


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## Spudd (Oct 11, 2011)

I think TD really made a great move when they took over Canada Trust. I'd been a CT customer for life, and I was scared when I heard TD was taking over, because CT's service was awesome and TD's was NOT. I had had a GIC at TD years back and it was horrible customer service. But they managed to keep the CT feel and leverage their scale. I am a big fan.


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## Square Root (Jan 30, 2010)

Jungle said:


> Now that Square Root and I are bank lovers, maybe he will let me play with his dividends
> Cheers to todays increases.


Yes, it's been a great morning. Funny that people can't seem to see this coming. The banks have outperformed expectations for quite a while now. I was really happy that TD raised it's payout target ratio as this is my biggest position and dividends are funding my retirement. I figure TD will probably raise divs by $.05 twice a year for the next year or two in order to keep in that range. I think TD Waterhouse may have crashed this morning so volume must be very high. I await the open.


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## Square Root (Jan 30, 2010)

Spudd said:


> I think TD really made a great move when they took over Canada Trust. I'd been a CT customer for life, and I was scared when I heard TD was taking over, because CT's service was awesome and TD's was NOT. I had had a GIC at TD years back and it was horrible customer service. But they managed to keep the CT feel and leverage their scale. I am a big fan.


One of the prime reasons TD bought CT was to get their staff and adopt their customer centric business model. It was executed well and the results have been spectacular over the last 12 years. Todays earnings results confirm this again. TDCT is giving the Royal a run for their money and this would have been inconceivable before the CT deal.


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## Square Root (Jan 30, 2010)

Jungle said:


> Now that Square Root and I are bank lovers, maybe he will let me play with his dividends
> Cheers to todays increases.


Thanks. Really good news across all three banks today.


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## Toronto.gal (Jan 8, 2010)

I'm a big believer/investor in our banks & insurance companies as well. Look forward to the next 20 year returns on both!


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## Square Root (Jan 30, 2010)

andrewf said:


> HP, that assumes there is no diversification benefit to a portfolio of ETFs holding thousands of securities vs a portfolio of 20 - 30 individual equities.


Diversification is certainly worth something but with only a small number of quality dividend payors in Canada that can be fairly easily put into a DIY portfolio, it seems to me that MER's are just too high a price to pay. My portfolio performs well compared to most MF's or ETF's and I get to keep all the dividends. Last point is the tax efficiency of my low turnover portfolio compared to MF or ETF's


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## mrPPincer (Nov 21, 2011)

This thread had me thinking of picking up 100 shares of TD today.
I couldn't help noticing TD dropped more than the tsx today too, in spite of a good earnings report and a dividend increase.
TD could be a good stock to do some options trading with, as well, the last few months of holding some REI.UN has got me liking those dividends, especially when they drip.

I'm glad I have a good solid week of work ahead of me in which to mull things over.. might be best to wait till January and do something in the TFSA.
I know this is nothing more than anecdotal evidence, but I have a friend who's fully retired at age 49 who keeps saying you can't go wrong with banks.


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## Belguy (May 24, 2010)

And September isn't even here yet!! Hold onto your money!!

http://www.theglobeandmail.com/glob...se-sp-500-hits-three-week-low/article4510414/


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