Four Investing Lessons I Didn't Learn in Business School
Like many other Canadians I have been fascinated with what is happening south of the border as our neighbours (note the “correct” spelling!), struggle with ensuring that every vote gets counted. Democracy is an amazing concept but sometimes the execution of democratic rights is a bit of a messy process, especially in the middle of a global pandemic.
Thinking about democracy got me thinking about democratizing the ability for the average investor to participate in reducing global greenhouse gas emissions by investing in a cleaner future. “Investing in a Cleaner Future” is exactly what we do at RE Royalties.
With our inaugural Green Bond issue announced in September, we are truly democratizing the ability to help the planet and we are offering a handsome return. Our bonds are available to any investor with a minimum investment of $5,000 and pay a return of 6% per year, paid quarterly. Investors can hold these bonds in their RSP’s, their TFSA’s, their RESP’s or their RIF’s and investors can be assured that we will use the proceeds we raise to help fund projects that will make our planet a better place to live. Furthermore, these bonds are secured against the assets of our company, so the investment is fully secured.
Sounds pretty sweet don’t you think?
There are, however, a few flaws caused by the fact that our current financial institution system is an oligopoly and that leads to the following lessons.
Lesson #1 – A self-directed investment account does not mean you have control of how, or where you can invest your money.
This seems a little counter-intuitive, no wonder my professors never told me this. It is after all your money, and self-directed is supposed to mean that you manage your money. It turns out that when you have a self-directed investment account at one of our traditional financial institutions, or even an investment account at one of the newer discount brokerages, they get to tell you what you can or cannot invest in with your money, and they can arbitrarily tell you what minimum investments they are going to impose.
For our Green Bonds, four out of the big five banks refused to let self-directed investors hold our bonds in their accounts. The fifth arbitrarily imposed a minimum investment of $25,000. That kind of defeated our intent of making our Bonds available to everyone. The discount brokerages were just as closed. One would allow our bonds to be held in their account, but only if we could commit to bringing them a certain number of new accounts.
Surprisingly, the financial institutions and the discount brokerages don’t do a very good job of disclosing these restrictions when they are pitching you to open an account with them.
Lesson #2 – Shelf space is important.
I may have learned this in my marketing classes, but I think it was when we were talking about grocery stores and consumer products. At RE Royalties, we think we have a great product. For shareholders, we pay a dividend, we have stable predictable revenue, we have demonstrated a strong growth trajectory, and we are helping the planet. For our Green Bond investor, we offer a solid return with strong security. Coming back to the grocery store analogy, it is like we have an amazing loaf of fiber rich, multi-grain bread that is good for you and tastes great. In this analogy, the traditional financial institutions are like the grocery store, they do not want to put our fantastic product on their shelves. They would rather sell their own white bread so that they can keep all of the margin on the bread sales. If we make a big deal out of it, they will give us some shelf space – on the very top shelf, behind a pillar, right next to the kitty litter.
Lesson #3 – It is all about the fees.
I did study some micro-economics and I had to endure management accounting, so I recognize that when you have a lot of overhead, you must generate a lot of revenue to cover that overhead. I also took enough marketing to know that when you have a captive customer or when it is a giant pain for a customer to change service providers, a pretty easy way to make money is to load up the fees. What I did not learn in business school is that if you have an investment product that does not generate fees for the large financial institutions, you are back to lesson #2 above … right next to the kitty litter. RE Royalties is not out raising hundreds of millions in the equity market so some of the institutions are not interested. They need big orders to generate enough fees to cover overhead.
The other way the financial institutions make money is by charging transaction fees on self-directed accounts. Many thrifty investors have moved to self-directed or “do it yourself” accounts to save the management fees. Green Bonds, or any bonds for that fact, should be straight forward; an investor puts their money down and collects a 6% coupon every year until maturity. There is no buying or selling or trying to time the ups and downs of the market to make money. The problem is, no transactions, means no fees for the financial institution.
Lesson #4 – Investing responsibly means taking the responsibility for where you invest.
Financial Analysis courses taught me how to break down a company’s financial statements and with all the available financial data, it is pretty easy to figure how a company is performing. It is way more difficult to figure out what they are doing.
I recently watched a fantastic documentary called “There’s Something in the Water” hosted by the David Suzuki Foundation. The movie was produced by Ellen Page and is available on Netflix. The movie is based on a book by Ingrid Wladron about environmental racism and focused on a few projects with very detrimental impacts on the water supply for several economically disadvantaged communities.
To my surprise, one of the “featured” projects was indirectly owned by a company whose shares I held in my self-directed RSP. I divested immediately, but it really drilled home the lesson that as an investor we all need to do our homework if we want to invest responsibly. I thought I knew the company and I understood its financial performance, but I did not know that they were attempting to build a project that would have unacceptable environmental consequences.
I believe that this lesson is really important for those of us who do it ourselves when it comes to investing but it is also really important for people with pension plans, financial planners, brokered accounts, or for those who use mutual funds or ETF’s. Even if you are a passive investor in an institutional or government run pension plan, you have a right to know where your plan is investing your money – but you must take the responsibility to ask the question. Also, take the time to find out the top holdings of mutual funds or ETF’s that you hold. Many ETF’s or mutual funds are advertised as addressing ESG (Environmental, Social and Governance) criteria. You need to do your own research to ensure that the companies that they invest in, meet your personal ESG goals.
Sitting here almost a week after the US Presidential Election, it looks like democracy has prevailed. A record number of Americans exercised their right to vote and no matter which end of the political spectrum you identify with, the people have spoken. It has however, taken a ton of effort by civic and state individuals involved in the electoral process, and the focus of the media and elected representatives to ensure that the democratic right to vote was protected.
Similarly, for RE Royalties, we still have a lot of work to accomplish to truly democratize the ability for individuals to invest in a cleaner future. Overcoming the restrictions imposed by the four lessons outlined above would be a great start.