Uninsurable Condos, Floundering Robo Advisors, and Counterfactual Thinking (EP.86)

Episode Summary

Executive Summary: The episode combines investing news, retirement planning, and a long behavioral-finance deep dive. The hosts discuss Canadian real-estate insurance stress, the robo-advisor industry’s weak economics, and Vanguard’s move into private equity. The centerpiece is counterfactual thinking—why investors regret past decisions and how hindsight, regret, and naive learning distort future choices, especially with volatile stocks like Tesla, Shopify, and crypto.

Main Topics: Canadian real estate insurance stress: They discuss reports of soaring condo and strata insurance premiums, higher deductibles, and occasional denial of coverage—especially in BC and Alberta—and how this can obstruct mortgage financing and potentially cap home prices. Robo-advisors and Wealthsimple economics: The hosts critique the economics of Canadian robos, especially Wealthsimple, arguing assets under management remain too small relative to massive acquisition costs and marketing spend, while also noting the industry is converging with human-advice firms. Value premium and factor model explanatory power: A listener question prompts a check on whether factor models have weakened. The hosts conclude that while the U.S. value premium has declined, the explanatory power of the factor model remains strong, with very high R-squared before and after 1992. Counterfactual thinking and investor regret: The main segment examines the psychology of 'if only' thoughts, including closeness, contrast effects, and causal inference. The hosts connect these ideas to regret over missing gains in stocks like Tesla and Shopify and to the danger of learning the wrong lesson from random outcomes. Evidence from investing research on repurchase behavior: They summarize research showing investors are more likely to repurchase previously sold winners and buy more of stocks that fell after purchase, which reflects naive learning and regret but tends not to improve returns. Vanguard’s private equity push: The episode closes by debating whether Vanguard’s entry into private equity is a bad idea or a pragmatic move to support high-net-worth advisory clients. The hosts question whether private equity still offers attractive expected returns after fees.

Key Arguments: Insurance availability, not just income or interest rates, may become a real constraint on Canadian housing prices and transactions. Robo-advisors were overhyped because many investors still want human interaction; the business model is expensive and difficult to scale profitably. The U.S. value premium has weakened, but factor models still explain returns just as well as before; the decline is in the premium, not the model's explanatory power. Counterfactual regret is strongest when the missed outcome feels close and emotionally salient, which is why investors obsess over Tesla/Shopify but not obscure small winners. Investors often infer that a specific action caused a bad outcome and then incorrectly change behavior, even when the market outcome was largely random. Buying back stocks that previously treated investors well reflects positive association and naive learning, but empirical evidence suggests this behavior reduces returns. Private equity may serve more as a product for wealth-management platforms than as a compelling standalone investment, given fee drag and converging public/private valuations.

Data Points: Episode number: 86 - Rational Reminder podcast episode discussed in the transcript Wealthsimple assets under management: $6 billion - Cited as the robo-advisor's approximate asset base Total Canadian robo-advisor assets: $8 billion - Article cited by the hosts Number of Canadian robo-advisors: 15 - Referenced in the Globe article Wealthsimple capital raised: $338 million - Amount invested into Wealthsimple mentioned in discussion Vanguard Personal Advisor Services AUM: $200 billion - Used as a U.S. comparison for robo-scale Wealthfront AUM: $31 billion - U.S. robo comparison Betterment AUM: $24 billion - U.S. robo comparison Robo break-even threshold: $16-$40 billion - Morningstar analyst estimate for U.S. robo-advisors to break even Average account size: $30,000 - Used to illustrate long payback periods for client acquisition costs Client acquisition cost: ~$1,000 per client - Estimated in the robo-advisor article Annual revenue per client: ~$150 - Derived from account size discussion Marketing budget: $20 million - Estimated ad budget cited for Wealthsimple SP 500 year-to-date return contribution: Two-thirds of ~4.5% from 4 stocks - Microsoft, Apple, Amazon, and Google accounted for most YTD gains Value model test period: Pre- and post-1992 - Regression used to assess explanatory power and alpha Regression R-squared: 99% - Explained variation in the value index pre and post 1992 Repurchase behavior: 1/2 to 2/3 more likely - Investors were more likely to repurchase stocks sold for a gain than those sold for a loss Trading drag: 1.8 percentage points annually - Discount brokerage clients' annual return reduction from trading in the cited study Living expectancy planning percentile: 25th percentile - Mentioned as mid-to-late 90s in retirement planning discussion Condo insurance deductible: Up to $50,000 - Reported in BC strata insurance examples Counterfactual closeness example: 5 minutes vs 30 minutes - Missing a flight by 5 minutes causes more regret than by 30 minutes

Pivotal Quotes: "History is only interesting because nothing is inevitable." — Morgan Housel: Quoted during the discussion on hindsight, uncertainty, and why future outcomes are hard to predict "Once WellSimple hit a billion dollars, the bombast started or something like that." — Benjamin Felix: Commenting on the Globe article's critical framing of Wealthsimple's growth and rhetoric "It’s very difficult to imagine from the psychological analysis of what expertise is that you can develop true expertise in predicting the stock market." — Benjamin Felix: Used to argue that counterfactual learning from stock outcomes is unreliable because market returns are too random

Implications: Listeners should be cautious about hindsight-driven regret, especially with volatile stocks and other random outcomes. The episode argues for disciplined, goal-based decisions, written decision records, and skepticism toward narratives that turn one-off outcomes into lessons about future investing.