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George & Phyllis Meet Mr. Dodge

June 5, 2012

The former Governor of the Bank of Canada, Mr. David Dodge, alarmed many Canadians when he told us that “we need to save more” – a lot more (Globe & Mail, March 19, 2010, Janet McFarland, “Canadians Not Saving Enough: Dodge”) – but today is Tuesday and two years later, and one wonders how many of us are going to be able to put away 20% of our paycheque(s) on Friday because most of us are just getting by on two incomes.

Are we, collectively, profligate, stupid, or what? The answer is, no, a resounding no, and Canadians could send a strong message to Parliament by simply refusing to spend the next 20% of their income this Friday, and the Friday after that, and after that, and so forth every week – assuming that we’re making $1,000 a week (which is above average, take-home, even on two incomes) – simply convert $200 into “twonies” and drop them all into a steel barrel, bolted to the floor, that can’t be opened but once a year (and certainly not until after Christmas).

Next April, the proud owner and family will actually have $10,400 in cash, which is a lot better than what might be guaranteed or expected by our mutual fund, index fund, and only a little less than our bond fund. The downside is that about $70 billion will be withdrawn from the “spending economy” – less consumer durables and fewer expensive vacations – and ready to enter the “investment economy”. If we put the money into mutual funds, then immediately, $2 billion – $3 billion, will be siphoned off into management fees for no discernible reason but to “buy” probable losses; best that we put the money into money market funds or bond funds and at least be assured of our capital. On the other hand, withdrawing $70 billion from the spending economy every year is about equivalent to not buying 140,000 new houses (and all that they require) every year, or not buying five or six million new or used cars every year, so one would think that would have a significant effect on the economy, possibly leading to recessions because of low demand, and layoffs in consumer industries.  Perhaps the Government will deal with that problem, too.

George & Phyllis: Ernst! Thank you so much! We’ve never seen $10,000 in one place and never thought that we would. We sold the second car to pay the children’s dental bills and send them to camp, and Phyllis got laid off at the carpentry shop, but that’s OK; I’m taking the bus to work to save money – you wouldn’t believe how expensive it was to drive my car every day, and how time-consuming! We feel like we’re rich!

Goetze: George, you are! I know lots of guys in the financial industry who make $200,000 a year and don’t have $50 in cash! Regardless, you should go and talk to one about how to best use your savings this year for your RRSP, RESP, or TFSA, and also tell them that you only want money market or bond funds, preferably government bonds indexed to inflation unless he or she can really explain what else and guarantee the result.

George and Phyllis, of course, are simply not equipped to deal with the equity markets, and perhaps sadly, neither is their investment advisor; in fact, few people are and even an extraordinary investor such as Mr. John D. Rockefeller who built Standard Oil from nothing more than one hundred years ago, was not equipped to deal with the equity markets (Ron Chernow, Titan, 1998) as anything other than a joust and a gamble!

But the equity markets are huge. For example, $70 billion is only slightly less than the combined net worth of our five largest banks, and less than 10% of their market value. There is no doubt that there is “fast money” to be made in equity investing over the long term and even the short term (sometimes), but no “easy money” – to keep – and certainly not as easy or as satisfying as dropping coins into a steel drum and reliably counting our money! And the equity markets are volatile, in fact, very volatile, and there appears to be neither rhyme nor reason in how prices are made and lost and when. But that’s another story, and a very interesting one that we have described elsewhere as “The Perpetual Bond” and the (1) zero risk and (2) zero beta stock portfolio.


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

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