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I just returned from a thought provoking talk by Kevin O’Leary at Thompson Rivers University.

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Kevin is best known for his sharp tongue in TV programs like Dragons Den, Shark Tank and the Lang and O’Leary Exchange.

Kevin had partnered with DW Page Wealth Management to bring together a crowd of 400 people at TRU to talk investments(mostly why O’Leary Funds are awesome), and all proceeds($8000) from the event were donated to the Kamloops SPCA.

Kevin’s controversial style came through a couple times, like when he was talking about emerging markets (lots of babies pooping in India, so lots of diapers to sell, etc… ), and the security of Senior Floating Rate Loans(if it was legal I would take your children as collateral too).

Despite his abrasive style that did get some laughs, this multimillionaire(net worth estimated at $600 million) had some gems of wisdom:

– he now follows his mom’s advice: don’t spend the principal, only spend the interest(ie only invest in yield)
– there is no way to know the value of Facebook, Twitter, RIM and other stocks that don’t pay dividends , so he doesn’t buy them
– people these days are very risk adverse compared to 2007
– people want preservation of capital and then some yield
– people are not as demanding for growth and are risk adverse

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Capitol preservation and income is more important to many people than the expectation of growth.

 

Investment Principals
Kevin shared a story and his three guiding principals. He spoke about his mom who died 6 years ago and he was the executor of her estate. She had a secret account that she kept from both her husbands. It was a 50yr old portfolio: 50% bonds and 50% dividend paying stocks. Her 50yr old portfolio beat everything(all other financial products). Take away: don’t buy anything that doesn’t pay dividends. Also three main rules for financial products:

1. don’t have more than 5% of your portfolio in any one stock/investment(including O’Leary Funds)
2. don’t have more than 20% of your portfolio in any one sector
3. 50% bonds and 50% stocks is a good portfolio mix

 

The Pitch: Promises

A great deal of time was spent describing a little known financial product called Senior Floating Rate Loans. There was a great deal of technical information and jargon in this part of the presentation as Kevin sped along. I have passed the Canadian Securities Course, and am an avid student of financial markets, and I must admit I had a hard time following the presentation. I even audio recorded some of it to review later(although I did not get the whole thing), and the information was certainly NOT in layman’s terms.

Basically, Senior Floating Rate Loans are difficult to find/invest in, always offer the same yield regardless of interest rates, and people who hold these loans are first in line to get paid if anything goes wrong with the borrower.

Kevin spoke about O’Leary Funds and described them as:

1/3 Senior Floating Rate Loans

1/3 Canadian Corporate Bonds

1/3 Dividend paying stocks

Stated yield over 2.8 years was 5.8%.(neglected to state upfront 3% advisor fee and dismal performance pre-2011).

20131126-111548.jpgAt 5.8% yield it would take 12 years to double your money!

The Pitch: Problems
Kevin O’Leary’s advice was definitely slanted toward selling his product, and included several plugs for Manulife Financial, his host for the evening(who will gladly sell you O’Leary Funds).

The presentation was geared exactly toward whom it was marketed to: people with $100,000 to invest who are 10 years or closer to retirement.  He predicted interest rates will go up 2% in the next two years and reminded the audience “if rates go up, bond prices go down.” A nice injection of fear to an audience who likely hold a lot of bonds due to their demographic.

There was promises of “safe” yield without any growth, and 5% annual ROI this was presented as acceptable.  Between the advisor upfront 3% fee and 2% inflation, you make nothing with a 5% yield! And how “safe” do you feel when your advisor is getting paid before you! No matter how well(or poorly) your investments do?!?

Kevin on Real Estate
I asked Kevin what he thought about cash flowing real estate.

He answered that if you have some, great, hold onto it. If you are looking to get in, be cautious. Real Estate transaction costs can be up to 12%, and it will take a long time to make this back. He said real estate will stay flat for the next 5 years, but conceded that he could be wrong.

He used the example of a first time homebuyer in Toronto getting into a condo and barely breaking even five years later because there may be no appreciation, and it would take that long to overcome the realtor fees/taxes lost upon a sale. This is hardly an example of cash flowing real estate with a tenant paying the mortgage, and was basically a weak attempt to make O’Leary Funds look better than direct ownership of rental property.

Furthermore, advice to avoid real estate contradicts some of his own statements to Real Estate Wealth Magazine in August 2013.

 

Conclusion

I agree with Kevin’s presentation on a few points:

– Invest only for yield(spend the interest, not the principal).

-Gold is useless but fun to look at and set on your table. It doesn’t produce anything.

-Worry about yourself, don’t count on the government to take care of you.

– Ignore celebrity, focus on the numbers.

 

Kevin closed his presentation by saying “If you can come up with a better way to make 5.8% I will give you my money. ”

I propose direct ownership in Real Estate as far safer with higher yields(easy over 5.8% per year), AND a great chance at capital growth.

So Kevin, give me your money! You will be happy with the ROI I promise you.

 

Until next time,

Stay S.A.F.E.