Let’s boil this down quickly – if you’re a Canadian and you do what everyone else does with your savings and investments you will never get ahead. As I explain why let’s look at what is happening in the USA. The USA is moving to execute a fiduciary duty on its financial advisors that includes a “conflict of interest” rule. The “conflict of interest” referred to is the fact that any financial advisor that is not fee-only receives a commission on what they advise their clients to do. In Canada, this is most advisors encountered by Canadians.
As Barrie McKenna writes, commissions put enormous pressure on the advisor to make sales volume targets and even discovers that because of this “…[j]ust to break even, investors typically must generate annual returns of 5 to 8 per cent to cover fees, commissions, trading costs and inflation…” an estimate from Victor Therrien, a mutual fund industry veteran and former executive vice-president of Brandes Investment Partners.
As one of the Canada Post unions moves to disrupt the Canadian Postal system, I think now is a great time to discuss Defined Benefit (DB) Pensions which is the main issue for the union. Most private companies have moved to a Defined Contribution (DC) system; why? DB pensions are eerily similar to Ponzi schemes moving some to call DB pensions “legalized Ponzi schemes” (where the taxpayer bails out the “last in” pensioner and the company offering the DB pension goes into bankruptcy). FiduciaryNews.com published an enlightening article on Aug 28, 2014 that dives deeper into this question:
What do you think? Do you think it’s fair for a small group of people’s lifestyle to be funded by the Canadian Taxpayer?
I personally do not believe this is fair, and in 1999 when I was offered the choice between DB or DC pension (the last year DB was offered at the company I worked at), I chose a DC pension. In all honesty, I would rather no pension* as I have since learned of a way to not depend on any pension system which I talk about here:
This above mentioned method is both responsible to other people (tax payers) and has the upside benefit of enabling more money to people in retirement than an equivalent DB pension (assuming the person starts the strategy when they enter the workforce and let it run for 25+ years like a DB pension would do). The method has been stress tested by people who have lived on the poverty line and still were able to use the strategy successfully.
* Pensions in the truest sense are government legislated rules to force people to save for retirement; the underlying assumption is that people are not capable of being responsible for their own future. Therefore, the government needs to step in with rules so people don’t blow their own foot off and leave the government and other people with a huge liability as people age.
You know that feeling, “I’m not saving enough. If I could only win the lottery…” That pressure we put on ourselves is unnecessary and in fact, the system is rigged against us. The financial system itself is intent first on accumulating money, second (or even third) is to make a profit for you.
Long-time investment advisor Adam O’Dell spills the beans on his former employers in an article entitled “Why I quit My job as a Financial Advisor” with “…I was expected to toe the company line and only recommend strategies and investments that were “pre-approved,”… Most of the time, that advice centered on “traditional” investment tenets: dollar-cost averaging (read: buying a little more each month), buy-and-hold (err, more like “buy-and-hope!”), asset allocation (but just long stocks and bonds). The odd thing, to me, was that our recommendations in 2008 [, a year of financial crisis,] weren’t all that different from all the years prior. The state of the market seemed to make no difference.”
We spend a lot of money on advisors and money managers. The trick is that they hide the cost in a low sounding management expense ratio (MER) of typically 1-2.5%. So how much is that really? I sat down and figured it out. Because it’s a percentage, we need to consider large sums of money, since the traditional retirement strategy everyone expects is big pot of gold and then taking a few coins out each month to live on. So I started with $100,000 but a more likely figure is several million. Drumroll please!! It costs us around $400-1400/hr (or more!) to pay for these funds and the time it takes to manage the money for you. Most people think twice about paying a professional this much money. Here is a spreadsheet which you can play with yourself. Try changing the number from $100,000 to $1,000,000 or whatever suits your fancy. Click here to access the spreadsheet. This then is why the universal recommendation is to only use a fee-only financial planner. One that doesn’t make commissions or is motivated to put you in funds that charge an MER.
Further digging into the spreadsheet mentioned, it tells us why that Mutual Fund or Exchange Traded Fund (ETF) basically treads water. Take that traditional retirement model; the big pot of gold. How many coins can we take out of it each year? Called “a safe withdrawal rate” my research indicates a reasonable amount is 2%. Remember, the fund is charging you the MER in retirement and also in situations where the fund loses money. So add the MER and the safe withdrawal rate together and you have a significant negative trend against building wealth.
There is a better way…. Something I stumbled on to. It has a significant history of success dating right back to the start of the stock exchange in 1602. Mr. Lowell Miller introduced the concept to me in his book, now a free PDF online, called “The Single Best Investment: Creating Wealth with Dividend Growth.” (It is also on amazon if you want to pay for the e-book or buy an old paper copy. Also, there are copies at most public libraries.)
Single Best Investment has also been called the “dividend achievers” strategy and is one of the few (only?) proven long term buy and hold strategies that work. What is it? Basically it is an investment in stocks that have raised their dividend every year. Meaning the investment is not for the dividend itself but the dividend growth rate. Click here for more on “dividend achievers”.
It works because it does two critical things:
eliminates financial fees
focuses money in companies that stay healthy with very low risk of long term downside
Because it is based on a growth rate for dividends, there is a “hockey stick” compounding growth graph. That also means it takes time and is not a “get rich quick” (GRQ) scheme. Other characteristics of this strategy are:
Simple, minimal maintenance strategy
Focuses on key factors important to personal financial situations: cash flow, safety
Still grows if cash flow not reinvested
Cash flow increases through retirement
Can eliminate the need to continuously save for retirement
Qualifies for debt interest deductibility (an advanced tax strategy)
If you made it the bottom of this article, congratulations. You are one of the few people who cares that your money makes money. Not many people do. North American society has all sorts of funny money myths, and collectively we subconsciously do not think we deserve it. Have you ever tried to talk to a fellow North American about money? You’ll see.
So what do I do? I have documented my experience and tools to help bootstrap people. Most people tell me they “don’t have the skills to invest themselves” but most people already do tasks many times more complex than investing. To list the required skills a person needs to know how to read, multiply, divide and handle percentages.
I offer a 2 hour introductory course and pay as you go coaching for people not inclined to read the book and do-it-themselves. To date, no one has ever needed more than 3 hours total. It is that easy. The strategy requires some time to setup, but then it’s “set it and (mostly) forget it”; just like buy and hold should be. For those who do not have much seed money and want to know what tools are available to help accelerate their progress, I offer an additional advanced course. If you think investing and saving is way beyond your lifestyle, consider that people making poverty line incomes have successfully used this strategy. That’s one of the many money myths.
About my involvement as a coach: I don’t make enough money from this for it to be anything but a hobby that makes a little money. The other reason I charge is because we can’t have a contract that places the responsibility for investing on the investor without doing so. The reason I coach is because I believe it benefits people. What I don’t do is provide motivation for conducting the strategy although I do discuss the psychological hurdles as part of the course. The psychology and the motivation are the hard part and finding tools for overcoming that comes from countless motivational materials available at any book store or library.
Did you know that accountants were hesitant to adopt spreadsheet programs like excel? Or that it took us decades to fully adopt trains, automobiles and computers? Do you think these things changed our lives? Of course! How could we conceive where we are today without them? But it took a while for them to gain “steam” (pun intended).
The situation with the Digital Oilfield in North America follows these familiar lines. It is a transformation that I cannot adequately explain since I only know how to build the enabling technology. How it’s going to be used is up to each person acting individually and resulting in a collective connected effect. Sure, I can give some examples or find people who have done this or that. But that’s the tip of the iceberg. The “killer example” is going to be different for every team in an energy company.
The enabling technology for the Digital Oilfield is called a “Connected Field”. It takes the Oilfield improvement areas listed below and binds them together. It’s the enablement of seamless intercommunication and coordination that truly leverages a Digital Oilfield. Without it, it’s an Oilfield that uses new Oilfield technology – not the exciting “Digital Oilfield” that truly propels the energy business to the next level.
There are so many ways to get a Connected Field wrong for a Digital Oilfield. Even with the right telecom vendors, it’s so easy to say “we don’t need QoS (Quality of Service)” – simply because the decision maker doesn’t know what it is. The fallacy is that there is a belief we already have a Digital Oilfield. There are already real world examples of a true Digital Oilfield using a Connected Field. And they are all in the Middle East; lowering their costs and increasing their supply. I cover a real world example later, so it will be easy to see the difference.
But let’s go back to the beginning. What is a “Digital Oilfield”? The concept was first presented in the seminal study: “The Digital Oilfield of the Future: Enabling Next Generation Reservoir Performance”, IHS Cambridge Energy Research Associates, Inc., 2003.
A Digital Oilfield makes the following improvements to the Oil & Gas business – and a Connected Field enables most of them; that is, you need a connected field to truly leverage the benefit to the full extent.
So what is a “connected field”? It is a data communications system that has these characteristics:
Completely and seamlessly covers the area of interest (like cellular data might cover all of the downtown of a city). This allows users to just turn on a device (sensor, video, etc.) reducing or eliminating the need to involve IT to justify a business case to obtain capital to expand the network. It just works. Technicians are not required to tune antennas at the user level. A rig can just move itself and still have full connectivity to all its services while it is moving and when it reaches its destination.
It is a committed That is, it is not a “best effort” network, shared with other companies and people in the area (like cellular data).
It allows full control – that is, it has quality of service (QoS) capabilities to prioritize business critical applications or applications requiring better service to function correctly (voice, video).
Let’s examine what is not a connected field:
Cellular data from any major telco. The reason why it is not is that it has no QoS and is best effort (no committed bandwidth) and may not cover the entire field without boosters (which are technically illegal according to the Telecommunications Act).
MPLS networks – in themselves, they would help if the purchaser buys QoS. If the cost of buying the right networks with QoS was used to price the rent option, it is likely that the system could be built from scratch less expensively. That is, a Digital Oilfield should consider the “rent vs buy” options like any procurement decision.
Satellite – the price per Mbps with QoS and dedicated bandwidth is horrendously expensive. Unless the company (including all teams and phases that work in the area) only expects to operate in the area for 6 months or less, it’s frequently the case that it is cheaper to build.
SCADA (legacy 450 & 900Mhz) – really this is only for “tin can on a string” SCADA data – that is monitoring / telemetry. There are now new SCADA radios that can supply QoS and bandwidth rates at 18Mbps or above but most Oil & Gas companies, especially in North America are not using them. Most of the SCADA radios in use today use technology that was developed during World War II and they have not been updated. We’re talking punch card era technology.
And of course, I hear all the skeptics. So what does a Digital Oilfield do in practice? Here’s an example:
Petroleum Development Oman (PDO)
Connected field coverage: 45,000 sq. km (17,000 sq. miles)
Increased a mature (brownfield) oilfield’s production by 100K barrels/day. At $90/barrel this is $3.2 Billion/year in additional revenue within one year. (Ok, yes, price of oil… but this was done in 2012 – even at $30 that’s $1 Billion)
Reduced drilling & completion days to online from 39 days to 14 days ($1M per drill saved). Including completions, saved $5M per well.
10 month payback.
What does the Connected Field network look like for PDO?
As of the end of 2013, Petroleum Development Oman field has:
6600 broadband connection points
52 base stations
13 Gbps total capacity, the equivalent of 500 connected homes or the bandwidth provided to a 4000 person office building
130,000 end devices
Compare this to a field of that size in North America; there are maybe 10 cellular base stations covering the entire thing. Everything overloaded to the point that it does not work that well (e.g. “worse than dialup” is what I frequently hear).
Together the Connected Field collects 36 times more data enabling more accurate and improved decisions. It delivers 4 Mbps anywhere within the field of coverage (compared to less than 300kbps in some fields available today). You can drive around in a truck all day long and everything just works.
No messing with devices, changing networks, etc. Need to talk to the engineer in head office and start a video chat about a valve to show him/her the valve? Done! No problems. Want to implement an intelligent video system to monitor the flare stack, look for pipeline leaks, identify personnel not wearing PPE, etc.? Want a “mobile worker”? (Please do not confuse it with a “mobile OS” which is simply an operating system built to enable mobile workers that have a network.) With a Connected Field, you just do it! No need to price in a brand new network to enable the business case.
The cost of all this? Less than 1% of the total injected capital into a greenfield area. And if a true connected field is implemented that is multi-use and multi-team capable, the expenditure is less than what they spend today.
Despite the impressive track record how many Digital Oilfields are there in North America? None. Some are close with partial implementations but it’s localised and not well championed at the executive and board levels. How many in the Middle East? Quite a few. Middle East operations have the direct support of the board of directors/families and executives. Would this situation have any bearing on the current supply / demand and geopolitical climate? Hmm….
There are two things to note about cost savings projects. They typically:
Reduce periodic General and Administrative (G&A) costs – so the savings that impact periodic payments do not “end” and could go on indefinitely.
Are beneficial in a good or bad commodity environment. There is no commodity price dependency!
Based on this, a company should always do periodic cost reduction projects – in a good or bad commodity environment since it increases the profit margin in good times and allows a company to survive longer than its competitors in bad times (and survivors always do the best in the long run).
I have been in Oil & Gas for over 17 years. And during that time I’ve been aware of more rural connectivity projects that have these characteristics than I could possibly handle… if only they would be approved and added to the queue. To add to the malaise, network costs are a top IT cost. See my article “Top Ongoing IT Costs – Data Centres and… Networks” https://www.linkedin.com/pulse/top-ongoing-costs-data-centres-networks-trevor-textor
Correct me if I’m wrong… but from what I recall from what Oil and Gas executives have told me, any Oil & Gas project with over a 30% IRR is always approved. However, it’s been entirely up-hill trying to convince Oil & Gas to approve these projects.
I’m going out on a limb here though…. Maybe the reason why is that they are connectivity (telecommunications) projects for rural areas? Connectivity usually falls within the IT department and from my interviews with CIOs, there is little focus on connectivity costs. That is, they feel that connectivity is not really an IT role but it gets lumped into IT so they suffer through it. I agree with them – IT is getting dumped on due to poor understanding of connectivity at the leadership levels. After over a decade doing rural connectivity, I believe that connectivity should be an engineering role and connectivity commissioning and operations should be in IT. This arrangement makes the basic procurement management build (engineering) vs rent (off the shelf) calculation possible. Let’s face it, IT is not engineering. IT is only going to rent. But most of the time, it is more effective to build in rural Oil & Gas locations.
The final nail in the coffin for this whole scenario is that connectivity is critical infrastructure (like water, electricity). This basically means you can’t do things that are expected of a company operating in the current economic environment without it. I have had to deliver the bad news to hundreds of promising Oil & Gas projects because the current network they have cannot support anything but the basics (e.g. kilobit per second SCADA – or what I call “tin can on a string” data). The cost of this one fact alone is colossal. I explain more about this in my presentation “Understanding the Remote Field Data Communications Challenge”
Great to see jurisdictions taking action with the digital divide economic problem: this is clearly a data communications (broadband) delivery issue or we wouldn’t need a United Nations Broadband Commission to educate countries about this. Mexican government’s digital divide initiative is delivering 1500 base stations to service 64,000 sqr km (25,000 sqr miles) using Redline’s product. Redline won the bid by demonstrating that Redline’s product needed less total base stations and has better longevity. A total cost of ownership (TCO) calculation. Job well done! http://yourcommunicationnews.com/redline+communications+awarded+%241.7m+contract+for+major+wireless+network+in+mexico_129241.html
What’s a payback period? How does it compare to Return on Investment and Internal Rate of Return?
A good question. A payback period is the time it takes for the benefit of a project (cost savings or increased revenue) to pay back the initial capital of the project. For example, you have a project that costs $2,000 and takes a year to complete. After it is completed it saves you $1,000 yearly (no end date in this example). That means the project will take 2 years to be paid back after the project’s completion ($2000/($1000/year) = 2).
So how does this compare to Return on Investment (RoI)? Simple ROI = (Gains or savings – investment costs) / Investment Costs. It does not take time into account. For instance, with the above example, after 3 years the RoI is ($3000-$2000)/$2000 = 50% but after 10 years the ROI is ($10,000-$2,000)/$2000 = 400% – so the RoI keeps escalating toward infinity over time… not very useful. Internal Rate of Return (IRR) however, is!
IRR is a compounding rate of return. I won’t go into the calculation but the above example has a ~50% IRR. Since it’s compounding we can use the “rule of 72” to figure out what this really means. The rule of 72 tells us how many years it takes to double the cumulative benefit. So 72/50= 1.44 years. So at 1.44 years the gain/savings is $1,440. At 2.88 years it is $2,880. At year 5.76 it is $5,760. And so on…
At left is the compounding “hockey stick” graph. This is the hockey stick graph for my “rewirement” strategy (9% compounded yearly) – coincidently this is the same strategy that I coach about. It’s the only buy and hold strategy that works in an up or down market, has over 150 years of market data behind it, is the laziest DIY strategy and that most anyone can do (assuming you understand addition, subtraction, multiplication and division).
A slow start initially and then ZOOM! upward. Compounding in action!
If you are interested in this strategy, I read about it in a book that is freely downloadable on the internet or you can get the book from a library or a used bookstore:
I liked reading it but many people tell me it’s boring… I guess I get excited enough about making money to read it through. What I coach in is the “how to” part; complementary to the book (or for people who don’t want to read it and want the summary). People are fully coached in approximately 2-4 hours depending on the person (2 hour basic course plus additional time as needed). However, I love to support “do it yourselfers”, and if you are one, you can probably figure out the “how to” part using Mr. Miller’s book with some invested time. However, if you want a jump start, please let me know!
I actually asked Mr. Miller if it was ok if I coached people using his book as the basis. He said “sure!”. You have to wonder… this strategy 100% works; always! Mr. Miller has published two versions of his book over the last decade+ before finally allowing people to read it for free on the internet. Clearly, people aren’t using it en masse. Every single person I have coached says “Why doesn’t everyone do this? It’s so easy!” and “I wish I had done this X years earlier.” No one has ever told me “this is a waste of time”. Mr. Miller is a fund manager – which the book basically discourages using. And even after Mr. Miller tells his clients not to use him and how to do it themselves, they still want Mr. Miller to manage their money. Such a strange world we live in!
Note: I owe recognizing the strength of this strategy as I read that book to my knowledge of IRR and payback periods. Good things to know!
When I mention “TowerCos” (Tower Companies), real estate companies that are like an apartment building landlord… but for towers, I can see the confusion in people’s eyes. Essentially, the tenants (renters) are antennas that get mounted to the tower (apartment building). What’s the best way to visualize what one looks like? Well, just look at their advertising – they have towers for rent! Here’s an advertisement showing that they have acquired new towers in the following USA geographic locations.
(click to enlarge)
The TowerCo industry itself comprises many companies across the globe. TowerCos already own 2/3rds of the world’s 3 Million towers. In the USA TowerCos own ~61% of the ~270K towers. In Canada, that figure is less than 5%.
TowerCo ownership, or companies that are exclusively real estate (do not sell telecom services), are a key indicator for broadband costs (e.g. cell phone data plans) since they offer a business model that promotes sharing and reduces costs. More about how the TowerCo business model reduces costs on my slideshare presentation entitled “Broadband Internet – The ‘Railroad of Our Era'”.
In the USA the top 3 tower companies listed on the New York Stock Exchange are:
All three operate as “Real Estate Investment Trusts” (REITs), further confirming that they are real estate companies. Collectively they own, lease and manage 95,000 towers and are worth $69 Billion. One of these top 3 companies, SBA, has moved into Canada with a subsidiary called SBA Canada. (@ early 2014) The other major TowerCo in Canada is Turris Corp.
Aug 9, 2019 update: From “Tower Talks with Inside Towers: #15 – TowerXchange CEO Kieron Osmotherly” I felt I should include this text from this podcast as it provides some important updates on the TowerCo market since I originally wrote this article Nov 12, 2015. On talking about the common fundamentals of the Tower market TowerXchange serves, no matter the geography/nations involved… (@9:17) “That basic driver that a telecom tower on a mobile network operator’s balance sheet is a depreciating asset built to serve the needs of one customer. You take that tower and you put it on a Tower company’s balance sheet and it becomes a potential source of long term recurring revenue from multiple credit worthy tenants.
We’re correcting a flaw in the original design of wireless communications which created this overlapping infrastructure and we’re correcting that to a more efficient colocation driven model. The capital markets recognize that. It’s reflected in the valuation performance of tower companies. It aggregates up to a 330B dollar global infrastructure asset class which is out performing most relevant comparisons.
As we mentioned before between them the tower companies now have 69% of the world’s investable assets which is a pretty good proportion. Most tower companies stick to that blueprint.
There is significant variation when you look at the difference between a pure play independent tower company like American Tower, SBA, Cellnex, HBS. These guys are fantastic at shareholder value creation and generating efficiencies. They typically trade at EBITA margins between 60-80% valued 15-25x.
And then we’ve got a relatively recent variant on the business model which we call the operator lead tower company; a slightly different animal. It’s at least 50.01% owned by the original parent mobile network operator(s). In comparison, to a pure play independent tower company you often see slightly lower EBITA margins of perhaps 40-60% and valuations of 10-15x are still significantly greater than the valuations of mobile network operators.
I think we’ve arrived at the day and age where pretty much everyone understands that a tower that’s trapped on a mobile network operator’s balance sheet is uh, it’s difficult to defend that position to shareholders these days. Whether you’re going to carve it out or sell it, it should be shared.”
Finally! The NPR Planet Money episode on Price Club / Costco. Why they purposely make shopping harder and why people love it. The quotes in this podcast are priceless; from the founder himself “I was adamant that we would not have signs telling people where things were because that would make it likely that they would wander through all the aisles and find other things to buy.”
Here’s something I don’t understand about people shopping at Costco. Clearly Costco is not a “quick stop” experience. There are no express cashiers! So why do people still insist on going to Costco to buy a single item???
Image of Costco patron buying only two items (that’s my stuff on the left) on Oct 30, 2015 – bananas and bread?: