Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

How hard is it to beat the market?

How hard can it really be to beat the market? If I say that all available information is included in the price of a security, it follows that someone had to act on the available information in order for it to be included in the price. Someone had to get the information, make a decision to buy or sell the security, and then execute a trade for that information to be included in the price. So every time someone can be the first to act on new information they must make a profit, right?

In 1945, F.A. Hayek pointed out that there are two types of information:

  1. general information that is widely available to all market participants, and
  2. specific information about particular circumstances of time and place, including the preferences and needs of each unique investor. 

As a pricing mechanism, the market is able to aggregate all information into a single metric. That metric is the price, and it is constantly influenced by participants competing with each other to be the first to bring information to the market in order to make a profit. As hard as they try, no single market participant can have the full set of information because new information is being randomly generated constantly. If someone overhears a conversation between two Apple employees, they are in possession of information that nobody else has; if someone sees an oil tanker sink in the middle of the ocean, they have unique information; if a pension fund manager goes on a site visit to a mine and hears something before everyone else, they have specific information particular to their circumstances – there is an infinite amount of information like this being constantly generated as time passes, and due to the nature of the market, people want to use their information to profit. What does this mean for investors?  It means that all available information can be included in the price of a security without any single provider of information being able to profit from the information that they contributed.

So in short, it’s really really hard to beat the market.

By: Ben Felix | 0 comments

Prescribed Annuity Income for a US Citizen in Canada

Every now and then we get a question from a client that results in some head scratching. Recently we were asked about the use of a joint prescribed annuity as a tool in an investment portfolio, simple enough. The complexity came from an American spouse. The Canadian husband was the annuitant, and while he is alive the income from the annuity will be taxed in his Canadian hands. Upon his death it will be taxable in his wife’s American hands. Both of them are Canadian residents living in Canada.

The benefit of a prescribed annuity is that its cash flows are taxed as a level blend of return of capital and interest throughout the life of a contract. This avoids the tax issue of a large portion of interest income early on. We know that prescribed annuities are recognized by the CRA, but how the IRS would treat them was not clear.

With some research, we learned that section 148(2)(b) of the Income Tax Act provides that upon the death of the annuitant, the annuity is passed to the spouse without any deemed disposition, and the surviving spouse becomes responsible for reporting the annuity income in her hands. US citizens are taxed on their income regardless of their country of residence, so the annuity income of the American spouse would have to be reported to the IRS and would be taxable as it is received. If the prescribed annuity exception was not accepted by the IRS, the sudden jump from level taxation could result in the annuity contract being much less favourable in the hands of the American spouse, while also eliminating the desired security of a level income.

The big breakthrough came from Article XVIII of the US-Canada tax treaty; the amount taxed in the US can’t be more that the amount that would be included in income in Canada. This means that the level taxation of prescribed annuity income in Canada would be treated the same way in the US, and there would not be a disparity between the foreign tax credit for taxes paid in Canada and the taxes owed in the US. Problem solved!


Here is the actual answer from a tax consultant:

Here are our comments based on the facts provided with respect to your client. Would you have a charge code for this work?


  • US citizen – married to Canadian (non-US citizen/non-green card holder)
  • Considering to purchase joint prescribed annuity contract

Since it is a prescribed annuity, under Canadian domestic tax laws (exception for the prescribed unity is at s. 148(2)(b) of the Income Tax Act), upon the death of the annuitant (the husband) the annuity is passed to the spouse and therefore there will not be any deemed disposition upon death in Canada. The surviving spouse will be responsible for reporting the annuity income as she is receiving year over year.

For US citizens, as they are taxed on their world-wide income, the annuity income will have to be reported in the US and it will be taxable as received. However, pursuant to Article XVIII of the US-Canada tax treaty, the amount taxed in the US can’t be more that the amount that would be included in income in Canada, in addition, the US citizen taxpayer would be eligible for a foreign tax credit in the US relating to the Canadian taxes paid.

In addition, as a US citizen, she might need to report the value of the prescribed annuity account annually on Form 8938 (foreign asset form) and possibly (TD 90-22.1 form).

If the US citizen spouse, upon death of her Canadian husband, decides to cease her Canadian residency and move back to the US, under Article XVIII, pensions and annuities from Canadian sources paid to U.S. residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Therefore, she would be subject to tax in Canada as a non-resident in Canada on the annuity income, but limited to treaty rate of 15%.

Please let me know if you have any other questions.

By: Ben Felix | 0 comments

How investing in growth can stunt your growth

Growing companies that have been increasing in price are often seen as great opportunities by investors.  Up front, the argument makes a lot of sense; the company is growing so why not jump on the wagon and grow with it? A quick look at the mathematics that drive stock returns illustrates the flaws in this logic.

The return that an investor will receive from a stock that does not pay a dividend is characterized by the growth in its earnings per share (EPS), and the change in its price to earnings ratio (P/E).

From this simple mathematical relationship it is easy to see that a large increase in EPS will result in a large return for shareholders; the caveat comes from the effects of a changing P/E. When a company is growing rapidly and investors are excited about the expected growth, these expectations are included in the market price of the stock at that time. This means that due to expectations, the price increases before the actual earnings increase. Growth companies will have a high P/E. Although the market price is high relative to the actual trailing earnings, investors are willing to pay a premium to hold the stock because they are expecting the growth to continue into the future. The problem lies in the fact that when an investor has identified a growth stock, the P/E is already inflated by definition; the market price already includes the expectations for future growth. Even as earnings continue to increase, it is much more difficult for the P/E to increase at the same pace as the earnings that are being realized have already been priced in. So even though the company is continuing to grow as expected, investors will not see their investment follow the same path. The moral of the story here is that although growing companies look like they will offer great returns for investors, it is important to assess how much is being paid to partake in the growth. If the premium at the time of purchase (P/E) is too high, holding period returns will likely be diminished.

Armed with this knowledge, one of the biggest challenges is to overcome the psychology of investing. It seems like a safe bet to invest in the companies that dominate the news headlines, and everyone loves to brag about their Google or Apple shares around the water cooler; the idea of saying that you have invested in some little known company that just went through a management change doesn’t evoke the same emotions. As much fun as it is to observe a good growth story, it is important to remember that all available information and expectations have already been priced in by the market.

By: Ben Felix | 0 comments

Risks Worth Taking

Wealth creation takes place when cash flow is steady, there is time to recover losses, and risk is tolerable.​

It's not uncommon for the ability to take risk in the market to be confused with the desire to gamble. There are some risks worth taking, and some risks that can turn an investment account into a sophisticated platform for placing bets.

​Of course, it's a lot of fun to do research and be immersed in the latest information about a company or an industry with the hopes of taking action before the market does. Consider, though, the amount of other individuals, and more importantly institutions and mutual funds, that are trying to do the same thing.

By the time you read a Bloomberg News headline, the market has already reacted. By the time the company you're following discovers a new reserve, institutions have already started trading. The ability of the collective players in the market to price a security as soon as new information develops is intimidating.

It's easy to think that with enough research, it should be possible to outsmart the market by predicting new information before it happens, but new information develops randomly. If we could predict all new information accurately we wouldn't need the market to create wealth.

So what's a risk worth taking?​  It has been proven through years of research that small cap and value stocks produce superior returns over the long term. Constructing a portfolio tilted toward these asset classes can increase expected returns without relying on speculation. With these tilts in place, diversifying globally, and across asset classes can almost eliminate non-systematic risk. You may never make 200% on a speculative bet, but major losses will likewise be reduced.

In creating wealth, the sequence of returns is just as important as the returns themselves​. It's very difficult to beat the long term compounded returns of a robust portfolio with a series of speculative bets.

This may not sound exciting, and it shouldn't. Well documented research stands behind these remarks - I'm talking about using science to invest, and science is not nearly as exciting as gambling.​

By: Ben Felix | 0 comments

Explaining Twitter’s Volatility

The price of a security reflects all available information. Practically, the price of a security is governed by the bid-ask spread that exists when people buy and sell it. The collective knowledge of the people buying and selling securities is what makes markets efficient. With that in mind, why was Twitter's share price so volatile after its IPO, and why has its price appreciated so much if it hasn’t turned a profit?

The value of any asset stems from the cash flows generated by the asset, the lifespan of the asset, the expected growth in the cash flows, and the risk associated with the cash flows. In the case of Twitter, we are really only concerned with the expected growth rate in cash flows in perpetuity, and the associated risk.

So why has Twitter’s share price been so volatile? The price is based on the opinions and ideas that analysts, traders, and fund managers have regarding the company's risk, and expected growth in future cash flows. The firm has not been changing, it is the excitement around the firm's potential to generate cash flows in the future that has changed. This excitement changes as new information randomly develops which is what makes investing in individual companies such a gamble.

All predicting aside, it is still a dangerous game to speculate on growth. Even if this company increases its earnings dramatically and becomes a stable performer, the price has to increase relatively with the earnings to make this a good investment based on growth potential. As actual earnings increase, it is not likely that the price earnings ratio will increase in step; the price will remain stagnant, or grow at a fraction of the rate of the earnings because the present value of those future earnings are already priced in today.

It is fun to speculate, guess, and predict what the price of a stock will do, but people often confuse this speculation with investing. Investing is a systematic, scientific action that should not rely on any predictions of future events. Luckily for our clients, PWL understands the difference between predicting and investing and our scientific approach is present in every portfolio.

By: Ben Felix | 0 comments