Investing in Canada
The TSX is three bets: oil, banks, and the price of everything Canada digs up.
See the concentration hiding inside a broad-sounding index.
How Investing in Canada works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why a solvent bank can die in 48 hours
The bank lent your deposit out. That is not a scandal, it is what a bank is. It only becomes fatal when everyone asks for their money on the same afternoon.
- 1
It is not diversified, it is concentrated
Financials and energy dominate the TSX. Buying the Canadian index is not buying a cross-section of an economy, it is taking a large position in a handful of banks and a commodity complex.
- 2
The banks are an oligopoly, and it shows
A small number of large banks with enormous market share, heavy regulation and long dividend records. That has historically produced remarkably stable returns, and it means the whole index leans on the health of the housing market they lend against.
Value a bank on price to book and return on equity, and then read the loan book. That is where banks die.
- 3
Energy sets the cycle
Oil and gas earnings swing violently, and their P/E ratios invert in the usual cyclical way: cheapest at the peak.
You can name what fraction of the TSX sits in just two sectors.
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The TSX is three bets: oil, banks, and the price of everything Canada digs up.
Price to book and return on equity read together, which is the only way a bank makes sense.