Picture a man named Frank. He is not a real person, but he is not far from a few I have known.
In October 1981, Frank is thirty four, has two kids and a mortgage, and he is standing in a line that stretches out the door of a bank branch on Yonge Street. He is there to buy Canada Savings Bonds. That year's issue pays nineteen and a half percent in the first year. Nineteen and a half. His mortgage renewed that summer at over twenty one, so this is not free money, but it is the best deal the government has ever offered a working person for doing nothing, and Frank knows it. He takes every dollar he can spare and lends it to Ottawa. Walking out, he feels like the smartest man on the street.
Ten months later, in August 1982, the stock market bottomed and began the longest climb in its history. Within five years the American market had tripled. Frank's bonds did what they promised: nineteen and a half, then ten and a half, for seven years, and by the time they matured his money had roughly doubled. That was a good outcome. It was also the worst decade in living memory to have chosen lending over owning, and Frank never quite worked out why the neighbour who bought shares of the bank instead of bonds from the government ended up with the bigger cottage.
Frank kept his habit anyway. Every fall he bought the new bonds. Twelve percent. Nine. Six. Then one year the rate was half of one percent. His son, now the age Frank was in that line, laughed at him. A few years later the government stopped selling the bonds altogether.
Here is where the story turns to you.
When Safe Money Paid Nothing
Frank's son grew up in a world where lending paid nothing, so he owned things instead. That was right. But he owned them for the wrong reason. A dividend stock at three and a half percent looked like a gift, so he bought it for the cheque. A private fund that promised eight sounded like his father's 1981 bond had come back to life, so he bought it for the eight. He did not ask what the businesses behind these things actually earned, or whether they would earn more next year than this one. He did not have to. Against a bar that sat on the floor, almost everything cleared.
Now the bar has moved. The best five year deposit in the country pays 4.55 percent this month. A Government of Canada ten year bond pays close to four. An American one pays more than five, the most in nearly twenty years. Nobody is lining up on Yonge Street, because these rates arrived quietly over three years and most people have not adjusted their picture of the world to include them.
The temptation is to be Frank. Take the sure thing. Lend, do not own. It feels like wisdom every time rates are high, and every time it has been wrong for anyone with more than a few years to invest.
The Bar, Not the Destination
Four and a half percent is not a place to put your money. It is the test your money has to pass.
A business worth owning earns a return on its capital well above what the bank pays on a deposit, and it grows that return over time. The bank rate does not change whether such businesses exist. It changes which ones deserve a place in your portfolio. When safe money paid one percent, a company earning six looked like a winner and a stock held for a three and a half percent cheque looked like income. Against four and a half, the first is marginal and the second is a deposit with risk attached. Neither has become a bad company. Both have stopped clearing the bar.
The businesses that do clear it are the reason to own equities in the first place: the ones whose earnings compound faster than any rate the government will ever offer you for doing nothing. When safe money paid nothing, you could own a lot of mediocre things and not notice. Now you cannot. That is not a threat to an equity portfolio. It is the best thing that has happened to disciplined ownership in fifteen years, because it forces the question that should have been asked all along.
I am not telling you where rates go next. Markets expect the Federal Reserve to hold this month and put better than four in five odds on an American increase in December. The Bank of Canada decides on October 28, and its governor said last week that it is prepared to raise rates if it has to. By the time you read this, all of that may have changed. Frank did not know in 1981 that he was standing at the top of a forty year decline in rates, ten months before the great bull market started. He did not need to. The rate in front of him was the bar, and the businesses across the street were clearing it. They still are. Fewer of them, more clearly.
How We Approach It
The portfolios I manage own businesses. Not deposits, not bonds, not funds that promise a number. Every position is a company chosen for what it earns and how that grows, sized to the client, and measured against the alternative of taking no risk at all. For fifteen years that alternative paid nothing and the test was easy. Now the bar is four and a half percent and the test is real, which is exactly how it should be. What was true at entry must still be true to remain, and this year that sentence has teeth.
Frank stood in a line because safe money paid something. It does again. The lesson of his story is not to join the line. It is to own only what clears it.
Forward With Purpose.
Ross Sikora