00:10:38 (someone): There's the traditional back and forth at a used car dealership with negotiations and, you know, what's my trade worth and et cetera, et cetera. So we can kind of take the guessing work out of it. So providing that all of the documentation that the client has provided to us on the application is accurate. We obviously verify that when we see the vehicle, when they come in to do a deal, that we can move forward from there.

00:10:59 Ben Felix: I did that when I sold my old car before getting the one that I have now. And I went through that exact experience and it was, I mean, it felt great because they, like you said, they put the car to open market and there's no haggling.

00:11:09 (someone): Exactly. Yeah. They're saying the car business, you know, it's only worth what someone's willing to pay for it. Right. So it's. Everybody, you know, whether it's your home, your car, whatever like that, everyone has a sense of pride and ownership when you own something and they always think it's worth more than it really is. So we, a lot of the time, we'll let the market exactly accept and show somebody what it actually is worth.

00:11:29 Ben Felix: So you talked about how supply is pretty tight. It's hard. The buying side is the biggest constraint for you, which makes me think, okay, so you pay more for the cars, but then of course the market's got to bear whatever price you've got to sell it for to make some money. So the question that I want to ask is where are the margins in this business?

00:23:08 Cameron Passmore: Do you have any recommendations as to like should I buy it at the end of the month because sales quotas are up? Should I be flexible? Should I make an offer and walk away? Are there certain tactics that work or is it market so efficient now that you really don't have that kind of leverage anymore?

00:23:24 (someone): I mean, I can't speak a whole lot to the new car side, being that I'm in the used car business, so it's very different for us. We used to be very cyclical in the sense that, you know, as soon as March break hits, the light switch turns on, it gets crazy busy. So if I was to say anything on the used car side, and I guess this can translate into the new car side as well, is that certain times of year that are typically slower for those dealers, from a volume aspect of things, that would be probably a better time, or there'd be maybe a little bit more incentive to make a deal on the dealer's end of it, to kind of pay the proverbial bills throughout the year, the rougher months like the December, January, February's in the car business.

00:24:01 Cameron Passmore: So that's the time to buy a car is in the winter time frame, typically?

00:24:05 (someone): I wouldn't say it's the best time to buy, but it's, again, you have to also look what's important to you as far as the vehicle. Do you want something, do you want a current model year vehicle? So are we sitting here, you know, in September, for example, is when they usually have the blowout of the previous model year, right?

00:19:40 (someone): But getting back to your first point, where it makes sense, yeah, everyone has lifestyle changes. So, you know, the average lease might have 20 to 24,000 kilometers a year. All of a sudden, if you change jobs and you require more travel for work, and all of a sudden you're in the car for 100 kilometers a day, and you're 12 months into your lease, and you know, you have 24 months left, and all of a sudden you're driving 40,000 kilometers a year, Then it doesn't make so much sense when you have to bring that vehicle back and spend $5,000 in over mileage penalties. The ability to get out of a lease is quite difficult. If you ever have to get out of a lease, I mean, there's ways to do it. A lot of people utilize, like for example, a company called Lease Busters and that type of thing.

00:20:21 Cameron Passmore: But in Ben's case, it'd been three years time. If he loves his vehicle, he can just buy it out and keep it and then drive it into the ground.

00:20:26 (someone): Absolutely. So that being said, so when you do buy that out, a couple of things to be aware of at the dealer. One is they may charge you an administrative fee to do that, just, you know, to process the paperwork. Two is you have to pay obviously whatever that residual it is, let's just say it's 20 grand, it is plus tax because you've only paid tax on the current payments that you've made on that vehicle. And thirdly, you also require, because it's transferring names from the, you require a safety on that vehicle.

00:33:49 (someone): So they say, oh yeah, I was just in the area. Well, I live, you know, 10 minutes from the store here and I hadn't probably been to Richmond in 15 years prior to that. So, you know, everyone used to come to the famous Richmond bakery here in Richmond and, you know, that closed down a number of years back now. So.

00:34:05 Cameron Passmore: So last question for you, Brad, how do you define success?

00:34:09 (someone): Having the flexibility to do what I want, when I want, is a big thing for me. I look back to almost 11 years ago, my kids, my son's 14, my daughter's 12, my son was just a little one. I look back at the first probably five years of my business here, where I probably didn't see them all that often, or as much as I should have. That was an eye opener and I always kind of envisioned myself having the flexibility and the opportunity to spend more time with them later in life, to be able to do the things that they want to do as well as the things I want to do. I think this business has fortunately given me the opportunity to be able to do those things. Yeah, as far as defining success, that's just kind of, at the end of the day, I just kind of, like I alluded to before, just be able to go home at the end of a long day, enjoy, spend time with my family, and this business has allowed me to do that, which I'm very appreciative for. Great. Thanks a lot, Brad. This was great. Well, thank you very much.

00:24:17 Ben Felix: I don't think that there's a universally right way to approach how you pay for housing, but I think one of the big takeaways, and this is not going to be news to people that have followed our stuff. One of the big takeaways is that the conventional wisdom and societal pressure that owning is better than renting, that's false. We'll talk about some of the math behind that, but in this decision, that's one of the most important inputs, is what are the cost differences? If one of the housing options is materially better than the other from a cost perspective, you might be willing to make more sacrifices on the other factors in the decision. If costs are equivalent, then you make it based on other stuff. We'll talk about how you can find cost equivalency in a second. Now, I've been renting for well, since I've been in Ottawa. That's 10 years now that I've been living in Ottawa. Before that, I was a student and as most students do, I rented. It's been, geez, like 15 years that I've been renting. Totally happy. I mean, sure, it would have been nice if I owned a home for the last two years in Ottawa with lots of leverage to get some nice tax-free capital gains, but can't predict that. To start, like I said, I think we have to talk to the costs of renting and owning. Renting, obviously the cost is rent, not a big deal. You pay renter's insurance, which is very cheap and maybe utilities if it's not included in rent, the cost of owning is not as obvious and this is the problem.

00:21:51 (someone): Well 0% essentially all it is is a manufacturer buying down that rate to the 0%. So Hyundai Canada will go to Scotiabank and say, here we need $3 billion at 0%. What borrowing capacity rate can we get the money at X and then it's going to cost you X amount. So for example, they don't pass that savings on to the consumer, they pass, you know, because they add, they have added incentives for cash purchases on new cars. Whereas in the used car business, we're not allowed to do that. We're actually, I mean, we're all governed by OMVIC, which is the Ontario Motor Vehicle Industry Council. We are on the used car side, in particular, we are all in pricing, meaning that when we advertise a price, The only thing we can add to that vehicle is obviously taxes and any licensing to that vehicle. We cannot add any additional fees to that vehicle. So when you see a price on our website of $10,000, it's $10,000 plus taxes and whatever it costs you to license that vehicle. But getting back to the new car side of things, so if you were to go buy a brand new Hyundai Santa Fe, for example, and the MSRP of that is $30,000, well you can finance that at 0%, but now the price is $32,995. So that $3,000 is added to basically cover the buy down of the rate to the 0%.

00:23:05 Cameron Passmore: So let's assume I want to go buy a new car. Do you have any recommendations as to like should I buy it at the end of the month because sales quotas are up? Should I be flexible?

00:35:28 (someone): I feel like we've set up this thing where I Retirement is this, like, swan dive, all or nothing, one-time, irrevocable, extreme, life-changing event that we build up to. And we build it up so much that we basically say you should make a bunch of sacrifices in order to get there, to the point that, I mean, I've seen this in practice, like, people that just stay in miserable jobs for years and years for the sole goal of trying to accumulate enough dollars to actually get to the point where they can tell their boss off, drop Mike and exit, and be done because they got enough money that they don't need to work anymore. And the phenomenon that I see for just one client after another, after another, having done this for 20 years now, is that for a lot of people, retirement is not a natural state of being. Absolutely. Human beings, we need something to do when we wake up in the morning. Otherwise, we become kind of listless and aimless pretty quickly. It can outright lead to things like social isolation, depression, divorce rates rise when retirement happens. There's actually a lot of negatives that can happen if we don't have a support system or at the most basic sense, a plan of what we're going to do. Not just what we're retiring away from, but what we're retiring towards. And often we don't get a fully fleshed out vision of what we're going to try to reach towards, right? I hear things like, I'm going to play more golf. Like, awesome, with who? Oh, I got a couple of buddies who are tying around when I do. Great.

00:46:28 Ben Felix: That's kind of intuitive. But it was interesting to see that there's studies that have shown that to be true. I thought about it though and I don't think it's really a reason to buy instead of renting. It's just kind of a consideration for renters. I rented as people who listen to the podcast know for many years and I I always had really good experiences as a renter collaborating with the landlord or the property manager to do stuff, small improvements. A couple of times we did bigger, bigger improvements. We actually split the cost of building a deck with a landlord in one of the places that I was renting. We lived there for four years. I think I got pretty good value out of it. I don't know if it has to be true that as a renter, you're going to take not as good care of your home and it's not going to be as nice of a place to live. It seems like something that we have some agency over as a renter. Economic effects, these are real. Forced discipline for savings through principal repayments. Tax benefits in Canada, you're not taxed on gains on your primary residence. That's a big deal. This one's really interesting. This came up in John Cochran's paper, Portfolios for Long-Term Investors too. An unowned home, a home that you own, is a hedge for housing costs. Cochran talks about that as similar to the risk-free asset for a long-term investor is the inflation indexed life perpetuity. Well, a house is kind of the same thing.

00:42:35 Ben Felix: When the total return stock index for each country or the world reached an all-time high in terms of total return, In that 10-year period? Just in aggregate. We took all of the months and looked at only months starting where the total return index was at an all-time high. Okay. We sorted the data by that and asked, does buying the dip work better when the market's at an all-time high?

00:42:59 Cameron Passmore: Oh, I see. That would be the signal to start and you wait for the dip from that all-time high.

00:43:04 Ben Felix: Correct. We looked at the full data series, but then we also looked at only months where we were starting with on all-time high. One of the things we found that was interesting was that peaks, so an all-time high that precedes, we defined a peak as an all-time high that precedes a decline of 10% or greater within 12 months. That only happened about less than 3% of the time across all these different indexes that we're looking at. An all-time high followed by a decline of 10% or more within 12 months. Wow. Happened 3% of the time. It just speaks to how rare that occurrence. When people say, oh, it's the markets at a new all-time high and that's a reason for concern, the frequency of declines after peaks is actually extremely low. All-time high months. Wow. Yeah, I thought that was pretty interesting too. For just all-time high months, how often is the market hitting new all-time highs?

00:26:35 (someone): When he bought it, my mom was shocked. She was like, where did you get this money? I didn't even know you had the money to buy this car. It was all the money he had and he told her, I didn't want you to marry me for my money. So you can get the idea of how important money was to him from the sense that $4,000 to him was the world. It was a lot of money and he was very private about it. He remained very private about his finances throughout his life. But he ran the store. The store for him was a means to an end. I don't think he was passionate about tile by any means. He could have grown it into a multi-location franchise or some sort of enterprise, and he just kept it as his store because it allowed him the freedom and flexibility to do the things that he liked to do, but also to earn enough of an income and save enough money to meet his end goal, which was retirement. It was very clear to my brother and I and my mom that really what he was doing with this business was using it as a way to support his future retirement. That's it. He was incredibly active. Even into his 50s, he had a six pack, which I respect to now. I don't think I respected it back then, but being 39 and seeing how difficult that is to achieve, I think is very impressive. He used to swim at the pool. He would do 80 laps per session. He'd do that three times a week, which was incredible.

00:30:22 (someone): So those vehicles right there are very hard to get, number one. So for example, here in Ottawa, What a dealer, the allocation they will get from one of those cars will be probably less than three vehicles, just based on the total volume that Porsche does on a national or international scale. Whereas you go to a large Porsche dealership in Miami, they might get 20 of them. just based on sheer volume of that vehicle. But that being said, there's a certain limited production of that vehicle, and there's a high desirability for that vehicle. And if you can buy that vehicle at MSRP at normal sticker, chances are that vehicle will be worth more than MSRP, you know, the second you drive it kind of off the lot. But that being said, most people that have those vehicles, if their intention is driving it as a normal car to drive every day, well then the, the opportunity for that to increase in value will go down based on the mileage part of the vehicle. Cause it's fair. Those vehicles are very mileage specific.

00:31:19 Ben Felix: So you're obviously passionate about cars. What would you say is your favorite part of the used car business?

00:31:25 (someone): Probably people. The day-to-day, I find it's a very unique business coming from both sides. It was on the new car side for a while. I like the opportunity to, one, be an entrepreneur, but at the same time have an impact on many people's lives, you know, either that, you know, that work for me or I love seeing the happiness on somebody when they've just picked up their new-to-them vehicle.

00:30:59 Ben Felix: I think it massively inflates the appreciation of houses and that's one of the issues with the whole, which one's better discussion. The opportunity cost of the equity in the home, this is a huge one. This is one people say, once you've paid off your house, you don't pay for it anymore. Once you've gotten a mortgage, your housing costs are just your property taxes and maybe some maintenance costs, but you don't have this big mortgage payment and it's not so bad. The reality is your housing costs actually increase once you've paid for your home. Your cash flow costs decrease. But the cost of owning a home in cash when you factor in the opportunity cost is more expensive than owning a home with mortgage. It's a total illusion. Oh, I don't have to pay a mortgage payment anymore. Great, my housing costs have decreased. But no, because you've got a higher opportunity cost by having a higher equity proportion, your opportunity cost increases. If you compare side by side, like we say, let's compare a renter to an owner and compare paying cash versus using a mortgage to finance the home. The cash purchaser falls behind in net worth the renter using 5% as the break-even rental number and we'll dig into that more in a second. The cash owner instead of the mortgage borrower falls behind in net worth very quickly, like within the first couple of years. Whereas if you take a mortgage, you're ahead of the renter for a bit and the renter takes a while to catch up. I haven't even said what the opportunity cost is.

00:07:02 Cameron Passmore: But you were saying before we started recording that the market has changed where it's really tough for you to get enough supply and having tried to buy used cars from my kids, it's tough to find the car. So given that as a backdrop, what should used car buyers look out for? Like it strikes me, you really have to know what you want and decide quickly because the next day the car's gone.

00:07:21 (someone): Absolutely, it's a very good point. So, when we go looking for cars, we will typically source from the normal types of areas. So, we will go to ex-daily rental companies, as they have certain hold requirements that manufacture. So, they will buy a brand new 2019, and they're legally required to keep that vehicle for six months and a certain amount of mileage on it, and then they will open that car up for sale. So that's a large source of our inventory for current model year stuff, 2018, 2019, for example, now.

00:07:52 Cameron Passmore: But you're competing with other people on the buy side as well, are you not?

00:07:55 (someone): Absolutely. Yeah, absolutely, we compete. And that's kind of where it comes into play. So my opinion and expression towards the car business, especially in the youth side, has always been buying is what makes the business run versus selling the cars. How you buy your cars is absolutely the most important and crucial aspect of running the business. So that being said, when we look at all of our inventory, we also look at lease returns. So we deal with some pretty big major dealer groups in Ottawa and outside of Ottawa that will bring back lease returns, you know, a three or four year lease.

00:48:55 (someone): So in a time when the average person, like December 2009, or I guess March 2009 was the all-time buying opportunity that I didn't take. And I can tell you guys didn't take either because you're still working for a living or whatever. But if you can spot that everybody else is, they are really worried about the risks to their business. And so they're dumping even though they understand it's probably a good time to buy. But you're a tenured professor or you're retired, you can afford to take a risk that you understand other people want to get rid of, you're probably going to get paid a premium to do it. Actually, March 1934, if you can go back and get a time machine, Go back to March 1934, that was the all-time bottom of the Great Depression. That was the greatest single month in stock returns ever. You want to buy February 1934, go back and tell great-grandfather to buy. There's the depths of the Great Depression. You're still taking risk. there was a good chance that America turned fascist and socialist and communist in the middle of the Great Depression. There was a good chance that we lost World War II. There's all sorts of risks there, but it was a good bet. So if you can, I think the best one is if you can identify your ability to take risk as different from other people, that justifies buying. And most importantly, now here's where we get a little fluffy, which stocks do you buy? by value stocks, growth stocks, momentum stocks, which industries do you invest in? How do you avoid the good stock versus good company fallacy?

00:51:01 Ben Felix: He came out and said, I'm actually changing this. I'm updating it to the 4.5% rule because I'm now including an allocation to small cap value stocks in my model portfolio. So he found the same thing. He found you could spend more by allocating to small cap value stocks. So they have bigger drawdowns. They're pro cyclical, but the expected returns are so much higher that in the data you can spend more. I thought that was worth pointing out. Now, the last piece might be the most interesting piece of the whole discussion. It debunks some what I would call common myths. If I asked when was the worst time to retire in this data set, and actually that's not true, not this whole data set. I didn't look at pre-1926. This is just 1926 onwards, not 1900 to 1926. I didn't look at that portion. I actually have a feeling the worst time probably would have been within that. But anyway, that doesn't affect the point we're making here. It was not 1929. So the worst time to retire from 1926 to now was not 1929. It was 1966.

00:52:07 Cameron Passmore: Which for the record was the best year to be born.

00:52:10 Ben Felix: Oh yeah? Yeah.

00:52:12 Cameron Passmore: Best year to be born from what perspective? Cause I was born in 1966.

00:52:16 Ben Felix: Ah, I thought there was some interesting data point that you had. I guess that is an interesting data point. Thank you.

00:21:59 (someone): We've seen – I've read the academic literature. If you're in Texas, you have a disproportionate – or that part of the south, you have a disproportionate amount of energy. If you're on the west coast, you have too much technology. If you're in the midwest, you have too much industrial and manufacturing. If you're in the northeast, you have too much finance and banking. People go with what they're comfortable and familiar with, comfortability and familiarity are not how you do okay or better in the market. So we're probably about 50% overseas, 50% US more or less. That's equal weight to what the world is like but that's high relative to what most people are like. So the good news over the past couple of years with US doing well, the people who suffer from home country bias are doing pretty well. The bad news is they got shellacked in 07-08, they got killed in 2000 and very often when you go through an event like that, you don't stay fully invested all the way. Capitulations occur, the word capitulation means surrender. Capitulations occur when enough investors throw their hands in the air and say, I just can't take it anymore, get me out, I don't care about the price. Bottoms are made when enough people puke up stocks and say, I'm out. Those are the worst times to be a seller and those are the best times to be a buyer. Very, very difficult to fight the crowd as either a professional or an amateur. We got lucky a couple of times but that's not what we sell to clients. That's not what we offer to clients.

00:19:11 Ben Felix: These companies, they're seeing their fundamentals grow, but their prices, their relative prices aren't rising. In fact, they're falling after being added to the growth So Fama and French in the paper that we're referencing here, they offer the explanation that companies that are allocated to the value versus growth portfolios tend to be at opposite ends of the profitability spectrum. Growth companies tend to be highly profitable and fast growing and value companies are less profitable and growing less rapidly. Then that's what gives the differences in relative price. That's all pretty intuitive, I think. The thing that happens is that that's not going to stay true forever. Competition from other companies for the growth stocks or just exhausting the most profitable growth avenues tends to eventually erode the high profitability growth of growth companies. Over time, some growth companies stop being as highly profitable and they stop growing their profits as quickly and their low cost of capital tend to increase and that results in them either dropping out of the growth portfolio or just having their relative price decrease. For value, it tends to be the opposite. Relative prices tend to increase after value companies get added to the value portfolio because some value companies restructure their business and improve their profitability. decrease their cost of capital. This idea of basically mean reversion in relative prices is called convergence. That's what Fama in French called it, which is basically predictable changes in profitability and growth and related changes in expected returns that occur because growth stocks are not growth stocks forever and value stocks are not value stocks forever. What did we see with Facebook? Well, their profitability forecast, their revenue forecast dropped and their cost of capital probably went up. Well, it definitely went up, price dropped, but that's something that happens to growth stocks.

00:37:59 Ben Felix: That's the ticket. It does take the renter longer to catch up in net worth to the owner, but over a typical 25-year mortgage amortization, a renter catches and then quickly surpasses an owner. I mentioned before, if the owner pays cash, the renter gets ahead much more quickly. This is one of the other common rebuttals to this whole concept that I see as well. You can get so much leverage with real estate, that alone makes it a better decision than renting because you can't get the same amount of leverage to invest in stocks. It's kind of advantageous, but mortgage debt is not an unsecured line of credit where you're making interest only payments. Then I guess if the owner continuously strips out equity to invest, okay, well, if we're going to do that, then on the renter side, then we should start using margin at some point to make the comparison even. Anyway, so leverage is not a silver bullet in the case of owning a home that makes it a lot better. How this can be used as a tool, if you find that $500,000 home that I mentioned, if it could be rented for 5% of that value, which is $2,083 per month, then your cost as a renter would be very similar to your costs as an owner. If you find a more expensive home, say you find a million dollar home, I don't know, maybe in Ottawa you could find this right now, If you find a million-dollar home that could be rented for $2,083 a month, then renting is a screaming good deal relative to buying. That's all this is. From a cost perspective, you can compare the two.

00:27:06 Ben Felix: Property taxes are a lot like rent actually because you're paying for services. You're not paying for housing directly. You're paying for services from the municipality and you don't get any residual value. It's a lot like rent in that way. Maintenance costs, they can also vary a lot. Homes, I think this is another one of the important pieces that often gets missed. Homes are depreciating assets. Land is not a depreciating asset. Homes, the building is a depreciating asset. asset for two reasons. One is physical depreciation and that's just like normal wear and tear. Then the other one is functional depreciation or obsolescence. As newer construction methods and materials make older homes less desirable, they depreciate. The older homes depreciate. Now those costs, you're paying them whether you pay them or not. That may sound strange, but you're either going to pay for fixing stuff up over time, then the property is going to maintain its value or if you don't fix stuff up over time, if you just let things go, then you're going to pay for the depreciation when you sell the house. Either way, depreciation is going to come out of your pocket eventually.

00:28:21 Cameron Passmore: For sure. I can't tell you the number of people that we've talked to lately that are buying homes on Everyone says, I got to put one or 200 into it. There's always a bath in these updating.

00:53:26 Ben Felix: There's a large UK study that found living near green space is associated with a longer life. There's a Canadian study that I think he had in the book too that had a similar finding. Then the other interesting thing is once we made that decision, okay, we want to live closer to nature, the rental opportunities are not as frequent. Renting in the city is fairly easy. Rental supply I think has been a little bit tighter, but it's still – It's not that bad. You decide you want to go live in the country, not a whole lot of rental supply. For us, we made this decision based on all of the other stuff. Then understanding that the cost difference between renting and owning is – For me, the numbers ended up working out that my total housing cost is a tiny bit higher with the new house than it was with my rent in auto when you take everything into account. We said, cost is immaterial here. Make the decision based on all of the other factors. We're at a point now where We're not growing our family anymore. We're not planning on moving around. My parents are settled in Ottawa, so is my sister. No reason to move. No need to expand the house. Family's close by. Buying made sense for all of the non-financial reasons. which is why we finally pulled that trigger. Yeah, so I think strictly speaking from a housing cost perspective, people have to understand that renting and owning can be comparable. It's definitely not automatic that owning is a good financial decision.

00:27:52 (someone): But yeah, I mean, there's protection. I mean, you know, everyone refers to cooling off period, you know, and I think it's at the, a lot of the time it's really at the discretion or the policies of that dealership. For example, we look at everything from, you know, because every scenario in our biz, every transaction is unique to itself. So, I'll give you an example, if we had a client in here that had made multiple trips to the store, they had sat down with their business manager multiple times to go over all of the parameters of the deal, financing, they signed all of the documentation, initialed where all they should be, they're fully aware and everything has been disclosed to them, and two weeks later they call us up and say, I just don't want the car anymore. Well that, you know, there's also protection on the side of the car dealer as well. It works both ways, you can't just say, here's my car back and because a lot of the time, especially if it was financed through a bank, the bank has now assumed liability of that loan and they can't just quote unquote unwind that deal. That's one example, a scenario where it could benefit the client. And again, at the discretion of the dealer, if somebody came in and said, you know, yeah, I'll buy that car and just get it ready for pickup and I'll pick it up on Wednesday. You know, they leave a deposit on the car, don't even sign a bill of sale, walk away. They call us up, you know, Wednesday after we've safety the car and stuff. Yeah, I don't want that car anymore.