Episode Summary
Executive Summary: This episode mixes investing commentary and Canadian tax planning. The hosts discuss their new theme music, then review Greg McKeown’s Essentialism, Tesla’s extreme market-cap surge, how Robinhood and brokers monetize order flow, a listener challenge about behavioral finance vs. active management, institutional portfolio models (Yale, Canada, Norway), a deep dive on Canadian income-splitting strategies, and a warning about a police-run Ponzi scheme.
Main Topics: Podcast updates and theme music: The hosts introduce new upbeat, Canadian-sounding theme music created by musician Trevor May and thank contributors in their online discussion community. Essentialism and prioritizing focus: Ben and Cameron discuss Greg McKeown’s book, emphasizing that essentialism means doing the right things, protecting priorities, and resisting glorification of busyness. Tesla’s explosive valuation: They analyze Tesla’s extraordinary rise in market capitalization and debate whether the price embeds unrealistic growth expectations or reflects a durable transformation story. Robinhood, payment for order flow, and market structure: The hosts explain how zero-commission brokers make money through payment for order flow and discuss possible impacts on execution quality and market behavior. Behavioral finance, active management, and confirmation bias: They respond to a listener questioning their treatment of behavioral finance and revisit the active-versus-passive debate, including skepticism toward a paper supporting active management. Institutional portfolio models: Yale, Canada, and Norway: They compare endowment/pension approaches: Yale’s alternative-heavy active-manager model, Canada’s total-portfolio/reference-portfolio approach, and Norway’s low-cost indexing with small active tilts. Canadian income-splitting strategies and Ponzi-scheme warning: They review legal tax-planning techniques for families in Canada and close with a cautionary example of a fraudulent high-return scheme marketed to police officers.
Key Arguments: Essentialism is about allocating time and energy to the few highest-value activities, not simply doing less. Tesla’s valuation reflects enormous future expectations; even if the company succeeds, returns may be muted if growth is already priced in. Payment for order flow may lower apparent trading costs, but its net benefit to retail investors is debated and can affect trade routing and market impact. The hosts’ view on behavioral finance has softened: market anomalies likely reflect a mix of risk and behavior rather than a single explanation. A literature review favoring active management was criticized for unclear selection criteria and for being authored by someone with a longstanding pro-active-management stance. Higher active share does not imply better expected performance; it mainly implies more concentrated bets and wider outcome dispersion. Yale-style endowment investing is expensive and hard to replicate because success depends on manager selection skill, governance, and patience from stakeholders. The Canada model and Norway model show different governance choices: Canada emphasizes internal expertise and active management, while Norway largely indexes with tight tracking-error control. Canadian income-splitting can materially reduce family tax burdens when structured properly, but must be documented and coordinated with legal/tax advice. Promises of 21%–26% returns are a classic fraud signal; easy registration and custody checks can help investors avoid Ponzi schemes.
Data Points: Episode: 107 - Episode number introduced near the start of the show. Tesla market cap: $322 billion - Market capitalization discussed on July 13, 2020. Tesla one-day market cap increase: $35 billion - Increase in market cap on Monday, July 13, 2020. Tesla weekly market cap gain: Combined value of the Detroit 3 - They said Tesla added in five trading days the combined value of GM, Ford, and Fiat Chrysler. Tesla share price: Just below $1,600 USD - Price level mentioned on July 13, 2020. Tesla and S&P 500 comparison: Larger than all but 9 S&P 500 companies - Tesla’s market cap ranking at the time. Robinhood payment for order flow revenue: Over $90 million - Reported for Q1 2020. E*Trade, TD Ameritrade, Schwab PFOF revenue: More than $300 million - Combined revenue from payment for order flow in Q1 2020. Wholesaler economics: About 3 basis points - Estimate of how much wholesalers make per trade flow. Broker payment to firms like Robinhood: About 0.8 basis points - Estimate of payment for order flow compensation. Yale endowment annualized return: 12.6% - Self-reported 30-year annualized return ending June 30, 2019. Yale endowment standard deviation: 6.8% - Self-reported 30-year volatility measure. Yale 2019 allocation to U.S. public equities: 2.7% - Asset allocation in Yale’s June 2019 report. Yale 2019 allocation to venture capital: 21.1% - Asset allocation in Yale’s June 2019 report. Yale 2019 allocation to leveraged buyouts: 15.9% - Asset allocation in Yale’s June 2019 report. CPP total costs: 84 basis points - Approximate total cost cited for CPP Investments managing $409 billion. Norway sovereign fund costs: 8 basis points - Total costs cited for Norges Bank management. Norway alternative limit: Up to 7% - Upper limit for unlisted real estate/alternative exposure noted in the discussion. Norway renewable energy infrastructure limit: Up to 2% - Maximum allowed allocation mentioned. RESP lifetime contribution limit: $50,000 - Maximum contribution room per child. CESG/grant limit: $7,200 - Lifetime Canada Education Savings Grant maximum cited. RESP contribution for max grant: $36,000 - Amount needed over time to capture the full grant. Prescribed rate loan: 1% - CRA prescribed rate for the quarter beginning July 1. Spousal loan NPV benefit: $271,000 - Estimated net present value over 21 years on a $2 million portfolio. Family trust NPV benefit: $311,000 - Estimated net present value over 21 years with two child beneficiaries and $11,000 annual income allocations. Ponzi scheme promised returns: 21% to 26% - Fraudulent returns promised to police officers. Ponzi scheme investor pool: $15 million to $20 million - Amount reportedly invested by about 40 officers and civilians.
Pivotal Quotes: "Essentialism is not about how to get more things done, it's about how to get the right things done." — Benjamin Felix: Summarizing Greg McKeown’s core thesis during the book review. "If you do not prioritize your life, someone else will." — Benjamin Felix: Key takeaway from the Essentialism discussion. "I actually don't think of it necessarily as risks or behavioral. I kind of think of it as risks and behavioral because both contribute or potentially contribute to driving differences in expected returns." — Marlena Lee: Clip played to illustrate the hosts’ softened view on the risk-versus-behavior debate.
Implications: Listeners should be cautious about narrative-driven investing, skeptical of apparent “free” trading, and aware that institutional success models are hard to replicate. For families, proper legal/tax structuring can create meaningful savings, but fraud remains a persistent risk.
From the Episode
And had more time to focus on, you know, listening, pondering, you suggest meditating, just enjoying time with the most important people in your lives as opposed to just being busy. And in this world where we're all connected to our cell phones and all the other devices, especially in this work-from-home environment, you know, you can be really cautious not to get dragged in because almost, as we've said at work, all the days kind of mash in together now, right? Your office is right in your home, and it's so easy just to keep doing it, especially, I would say, I mean, we're fortunate you and I were. We love what we do and we do spend a lot of extra time doing this, but I think you'd agree it doesn't necessarily feel like work to us. Yeah. I do agree. Anyways, main point, he says: if you do not prioritize your life, someone else will. And he says your highest priority should be to protect your highest priority. So, I think it's worth reading. Another interesting quote that he mentioned is that the word priority came into the English language in the 1400s and it was singular. It meant the very first or prior thing. He said it stayed singular for the next 500 years, only in the 1900s, did we pluralize the term and start talking about multiple priorities? Huh, that is interesting. Worth reading. I'm enjoying it. Worth reading 16 chapters at least.
And the Canada model, which are largely similar in terms of their large allocations to alternative asset classes. Just the difference being in the sort of governance model, I guess. Or maybe the management model, whatever you want to call it. In both cases, you have a lot of complexity and you have high costs, which come with complexity. I think it definitely appeals to the agency issue that you were just talking about, Cameron. Now, that rightly raises the question: if the smartest, largest asset managers in the world are managing money this way, why the heck aren't we? And why aren't all of the people that are doing index investing? Is it because they don't have enough money? Is it because they don't have access to the managers? Like, why should people not be striving to invest the way that these big, smart institutions do? Norway is the answer. Well, it's not the answer, but Norway has their own answer to that question. So Norway is, like you mentioned earlier, Kevin, the single biggest fund in the world at around a trillion US dollars in assets.
And I think the real estate is slotted in with the fixed income. Now, the most interesting part to me, my bias is coming through, is that when you look at their investment strategy, which is set by the Ministry of Finance in Norway, and then the actual management is done by Norge Bank, but the strategy and mandate are set out by the Ministry of Finance. They talk about on their website how their investment strategy is underpinned by a core set of beliefs. The first one, at complete odds with the Canadian pension funds that I just mentioned, and absolutely at complete odds with the whole Gale model, their core belief, their first core belief is that markets are largely efficient, not inefficient. So you can see why that asset allocation flip happens where they're largely indexed with slight active as opposed to largely active with slight index. It's because their belief is the opposite, which I guess makes sense. So Norway believes that the Ministry of Finance believes. Believes that markets are largely efficient, diversification is absolutely necessary.
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.