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  • Are Canada’s Big Banks On Your Side?

    In this Newsletter, I will share my experience taking over my elderly father’s retirement accounts, the issues I encountered, and the frustrations dealing with his bank to make it right. Through this experience, I have realized that the financial system in Canada is set up, by default, to capture you and your money, and that stepping away from the system is not always easy.

    My Dad is now 87. He has some memory troubles but thankfully still lives a simple, independent life at home with help from family and friends.  He is no longer interested in managing his own accounts because for the most part, he is unable to. His bank which I will refer to as “The Bank”, advised us that they were no longer comfortable with us managing his affairs informally and asked that we seek power of attorney over his financial life.  Basically, a formal legal way to manage my Dad’s day-to-day financial needs, pay bills and taxes, cash cheques, and look after his investments.  Most everything we were already doing informally.

    Luckily, Dad was on side with the Power of Attorney approach. I understand that if the loved one is not cooperative, this can get messy. Upon gaining full access to his accounts, we were shocked to find out that a large amount of my Dad’s wealth was unproductive and sitting in cash; his TSFA was not maximized and his RRIF (Registered Retirement Income Fund) had too much money in it for his age, which could create a huge tax bill should he drop dead unexpectedly.

    If that was not bad enough, all his investments were in The Bank’s mutual funds: higher fees and lower returns.  There was no US or international funds or any real sector diversification.

    Historically, Dad always seemed to be happy with his returns from The Bank, and a long time ago they might have been fine, but at this point they had become a disaster. I do feel guilty not stepping in earlier, but like many relationships with elderly parents, there is only so much you can do when they are still in charge.

    You would have thought that having a son who invests as a hobby would provide my Dad with an edge in investing.  The reality is a little more complicated.  I generally provide financial advice to friends and family when they ask.  I have provided advice over the years to my parents but what they did with that advice has been mostly unknown to me.  There is also a sense of not wanting to be responsible for the financial health of my parents. What if bad luck or ill-timed advice resulted in a negative life-changing to them. How would I live with myself if they had to eat cat food and shop at the Dollar store because of me?  Mind you, my Dad loves the Dollar Store no matter what.

    Surely Fixing my Dad’s Accounts Should Be Easy…Right?

    This has proven to be more difficult than thought.  The Bank has interpreted a clause in our Power of Attorney to mean that only their investment products can be used as investments.  This means no direct investing, no stocks, and no international ETFs; nothing but the Bank’s most conservative mutual funds.  They advised that if we wanted more flexibility, we’d have to go back to the notary and change the Power of Attorney.  I countered that my Dad could walk into a branch and open a direct investing account now.  They said sure, bring him over and he can sign some documents.  I countered: “surely you do not want me to move my mobility impaired father to a branch just for a signature?  Could we not have him sign it at home?”  Nope.

    Making The Best Of A Bad Situation

    Not finding any solutions, I made the best of the situation. I readjusted his accounts in order to be fully invested, maximized his TSFA, lowered the cash levels to only what he needs for the current year, and redirected all the investments to a more appropriate set of mutual funds.  This is much better than before – he is now generating more monthly income and is in a better tax situation.  However, I am still stuck in The Bank’s ecosystem – paying big fees and living with mediocre returns – but at least it is a big leap forward.

    This situation confirmed my dislike of Canada’s big banks.  Most average investors that I know invest within their Bank’s ecosystem.  It’s easy, local, and less intimidating than a lot of the other options. I can see why my parents did business with The Bank.  The other problem is that my parents, like many Canadians, are not rich. A few hundred thousand dollars is a lot of money to my parents, but it really wasn’t enough for The Bank to be bothered moving the needle with their level of service.  It’s actually in The Bank’s best interest to keep their clients in mutual funds where they (the bank) makes lots of money on management fees with little to no work.

    They add up, year after year…..

    I have not identified which Canadian bank I have been dealing with so as to avoid any legal repercussions. This also provides me with the ability to say that this one is truly evil, and the biggest.  To be fair, there are only 5 big banks (more or less) in Canada and in effect they are all regulated the same way, so my experience would likely be similar with any of these banks.  They are all basically evil, oops, said it again. I have no problem, however owning their stock: they do know how to make money.

    The Squeaky Wheel? Or Money Talks?

    Having accepted that I was trapped in The Bank’s ecosystem, I nevertheless expressed my dissatisfaction in an email with a different Bank rep in my local area.  Without knowing it, my email got some attention and I was asked to attend a meeting to discuss how I could be better accommodated.  Now all of a sudden a few different options have been made available to me, including opening up a direct investing account or adding my Dad to my existing family Wealth Management Account.  They even agreed that my Dad could sign documents at home. Easy peasy!

    Did this all change because I complained? Was it because someone realized that I happened by shear coincidence to have a wealth management account with The Bank and figured that it was in their best interest to keep me happy? I will never know for sure, but what you can take from this is that it costs nothing to stand up for what you think is right.  Banks are big and if you cannot get resolution one way, there are other avenues to take within their system.  It all comes down to finding the right person who is willing to help.  In the end, there are other similar banks that are willing to manage your money.  Levels of service vary amongst banks, provinces, and local branches.  In this case, my experience with The Bank’s Montréal office was horrible, but it was totally different and much better in the Gatineau office. 

    Final Lesson

    There is no doubt about it: if you’re a small investor in Canada, you are likely caught in a bank’s ecosystem.  You may not think about it much, you may not even know that there are better alternatives.  I have always said that the small investor eventually has to graduate away from mutual funds in order to benefit from lower fees and higher returns.  In the end we are solely responsible for our own money and should not depend on The Bank.  We need to take charge and invest in ways that are more efficient and beneficial to ourselves and avoid padding The Bank’s returns.  The small investor can still stay within a bank’s ecosystem by opening up a direct investing account, which allows the purchase of low cost stocks and ETFs.  

    Wait A Minute – Is There An Elephant In The Room?

    I know I am going to get some slack for investing most of my Dad’s wealth in equity.  He is old, and should only be in fixed income, right?  Well, the big picture is that my Dad is never going to spend all his money.  He already has a pension that covers most of his expenses.  The reality is that the investment horizon for these accounts are not for my Dad, they are for his heirs.  One day, not too long from now, my dad will depart this earth and his wealth will pass on to me and my sister.  This means that those accounts should reflect our investment horizons, which with a bit of luck will span twenty years or more.  My Dad and my sister are comfortable with this approach. Dad is well taken care of and he will have enough money no matter what the future may hold.  We are just investing it in a way that is best for everyone, but not so much for The Bank.

    Sorry there was no Newsletter in July.  

    Marc’s Monthly Moves

    • No buys or sells in the last 2 months.

    Marc’s Portfolio YTD Performance

    • Portfolio return: 13.4 % (including currency gains)
    • Portfolio return: 10.5 % (without currency gains)
    • S&P 500 return: 16.45 %
    • RSP ETF S&P equal weight 8.23 %
    • TSX: 10%

    The portfolio is under performing the S&P500 by 5.95 % points.

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  • Investing Styles: Which One Makes The Most Money?

    In this Newsletter, I will present some of the most popular investing styles and discuss the relative returns you could expect from each. I have tried many, but not all of these styles. The reason I haven’t tried some of them is that they are dumb and stupid, obviously… ok maybe that’s harsh… let’s’s just say they didn’t not fit my financial objectives.

    Popular Investing Styles

    Winging It

    This is how most small investors start investing.  There is no real strategy or plan. It’s surprising how often I see this approach. It’s generally based on buying stocks that are in the news, recommended by your dentist, or worse, plugged by a YouTube influencer. Returns are highly variable, but mostly abysmal. The reality is that most small investors have average returns of about 3-4%. 

    Value Investing

    This is the true “buy low, sell high” approach.  It involves finding undervalued companies that the market has overlooked.  These stocks generally tend to be boring and characterized by slower growth.  There are no standards to determine what is a value stock is, but any stock with a PE ratio below the market average is likely in this camp. 

    Value investing is very old school but still very popular, and for many years this approach over performed.  However, it has been out of favour and underperforming for the last decade.  Returns have been ok, but not compared to the more aggressive growth investing.

    Growth Investing

    This approach is the opposite of value investing.  It involves buying high and selling even higher. The idea here is that fast growing companies will continue to grow fast and the price you pay for it is not that important.  A lot of technology companies fit into this category – exciting companies with so called “bright futures”. At the extreme, many of these companies do not make money but have high revenue growth. These companies are found at the upper end of the PE ratio spectrum. 

    Surprisingly, this strategy has been the leader for most of the last decade (much to the chagrin of Value investors). If you look at Nasdaq 100 returns, which are primarily growth and technology stocks, it returned over 20% per year by average over the last ten years. Growth investors have been doing well but trends do not last forever and market reversals can be super painful. 

    Momentum Investing

    Momentum investing is a subset of growth investing.  It involves picking stocks based on price movements.  Momentum investors watch the charts to identify stocks that are suddenly gaining in price.  As more Momentum investors get in on the action, the price keeps appreciating.  Any stock will do here regardless of quality, PE ratio, sector etc. It’s all about price momentum and getting on the train.

    Oddly, like growth investing, this approach has been successful despite the lurking dangers. In a rising market, which can last for years, it’s very possible to over perform for a while.  The dangers are obvious however, as any broad reversal in the market could create a huge train wreck.

    All Weather Investing

    This approach involves building a portfolio that will do well in any market. The rationale behind it is that no one can predict the future, so it’s best to be ready for anything the market throws at you.  Survival is the key idea here. 

    This was a very popular approach at one time and is still followed by many.  In its purest form, a portfolio would comprise stock, bonds and gold. Some people add commodities (metals, orange juice, etc.) so there can be many variations.  All weather investing is a good approach if you distrust the market or cannot tolerate volatility.  This approach almost always underperforms as there is a cost to being so defensive. At the same time, it would be difficult to lose your shirt as there is a lot of safety built in.

    60/40 Investing

    This simple approach is a standard in the investing industry. It involves holding 60% stock and 40% bonds or other fixed income.  What could be better than equity returns mixed with fixed income for rock solid returns?

    Similar to the all weather investing, this approach under performs the market in the long.  When interest rates were near zero for example, only the equity portion (60%) of the portfolio was pulling its weight, while the fixed rate part (40%) of the portfolio was generating almost nothing. With interest rates at ~ 5% the argument for this approach improves. In certain markets, 60/40 investing can outperform in the short run. Like many approaches that promise safety, you pay for that with lower returns over the long run.

    Concentrated Approach

    This approach involves only investing in a small number of high conviction stocks that you truly believe in.  The idea here is that if you rank all your stocks, why would you want to include any picks after 8 or 10? They’re only getting worse the further down the list you go.

    Some of the most successful investors in history have had concentrated portfolios.  Most concentrated portfolios contain only 5-10 stocks.  The issue with this approach is that these portfolios are much more volatile, can underperform for long periods, but if done correctly, can out perform in the long run.  Warren Buffet adheres to this approach.  The problem is that most small investors are not Warren Buffet, and the approach is likely to fail if applied by an amateur. Returns will be very variable with such low diversification. Either really good or really bad.

    Super Diversified

    This approach is essentially the opposite of concentrated investing. It is based on the idea that no one knows the future (it could be bad), so there is safety in numbers. Portfolios of 60 positions and up are not uncommon.  This might also be a sign that you’re a stock hoarder. 

    There have only been a few famous investors, like Peter Lynch, who managed to consistently beat the market with this approach.  Peter held hundreds of positions in his super successful Magellan fund 1977-1990.  It’s relatively difficult to beat the market with this approach because statistically the more positions you have, the more like the market you become.  This is not a bad thing, but if you want to over perform, it’s tricky.  If you’re not good at investing, your returns using this approach will not be so bad if you have a bit of everything in your portfolio.

    Income Investing

    Income investing concentrates on fixed income and dividend stocks. It is the turtle approach. Any form of fixed income (i.e. bonds, GICs etc.) will drag returns down in the long run. Big non-growing dividend companies will act like bonds, lowering your returns in the same way. 

    This is approach is popular with those who do not like market volatility, prefer a safer risk reward ratio, and need a reliable income.  It’s best for older, retired people. The only way to get close to market like returns using this approach is through a dividend portfolio, where there is some growth in the company and some growth in annual dividends.  It’s not a bad approach if done this way.

    Which Investing Style/Approach Makes the Best Returns?

    As you can see, there are all kinds of ways one can invest in the market.  And these aren’t all of them; there are countless others like ESG (Environment/ Social/ Governance), passive, buy and hold, mutual funds, coffee can, etc. 

    Unfortunately, there is no one right answer to this question because the market changes all the time. Momentum and growth is the flavour of the day now and has been for a long time.  But this will change.  For brief moments, like when the market falls for a couple of years, even fixed income can be the best choice.  Heck, even cash will outperform in that scenario. 

    So What Is The Small Investor To Do?

    My approach and advice is to stay adaptable and not focus too much on any one strategy. I prefer to stay 100% equity and well diversified across sectors, countries, and investing styles.  It’s ok to have expensive growth stocks, but I also want out-of-favour value stocks, some growing dividend payers, some international positions, and a couple of small speculative positions.

    I realize that chasing popular stocks (growth and momentum approaches) has paid off for a long time, but this approach can pose the biggest threat to your financial future if you think that it will be successful forever. In a past newsletter, I may have mentioned that I murdered $100K during the dotcom bubble in 2000; I was running a growth/momentum strategy at the time.  In my opinion, its best to keep the portfolio running at a good safe compounding pace rather than risk a train wreck.

    My Portfolio Summary

    It’s been 2 months since the last newsletter (sorry) and the market has reverted to pushing forward with the usual expensive technology and communication leaders (growth/momentum).  Until that reversion, my portfolio was catching up fast, but with companies like Nividia continuously marking strong new highs, it’s hard to compete.  Unfortunately, the portfolio has fallen considerably in a very short time. 

    To give you an idea of how crazy the market is, in the last month, Information Technology gained almost 13%.  This strong performance means that every other sector underperformed the SP500 index, which came in at 3.2%.

    To make matters worse, returns for all other sectors except Communications (+2.4%) and Consumer Discretion (+1%) were negative!

    It’s almost impossible to beat the market right now without taking on huge risks.  On a brighter note, if you invest in market ETFs, you are doing pretty well, however your market risk keeps rising.

    I do expect the market to revert back to focusing on the more boring stocks as the market cannot stay stupid forever.

    Marc’s Monthly Moves

    Sell

    • United Health Care – UNH, exited the position 64% return

    Buy

    • Shopify – increased existing position slightly
    • Archer Daniels Midland – ADM increased position
    • CVS – increased existing position slightly

    Note that the changes above reflect some rebalancing of sectors.  There is no strategic change to the portfolio.

    Marc’s Portfolio YTD Performance

    • Portfolio return: 11.4 % (including currency gains)
    • Portfolio return: 7.95 % (without currency gains)
    • S&P 500 return: 14.57 %
    • RSP ETF S&P equal weight 4.94 %
    • TSX: 2.85%

    The portfolio is under performing the S&P500 by 6.52 % points.

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  • Why Is It So Hard To Beat The Market?

    April 2024, Newsletter

    I have often talked about ways to beat the market, or at least get market-like returns, in my Newsletters. In contrast to this, there are many experts who will tell you that it’s near impossible to beat the market consistently.  It’s no secret that beating the market is difficult and unfortunately this is particularly true for most small investors. But it doesn’t have to be that way, and in my opinion, it’s pretty easy to get market-like returns. And with a bit of strategy and luck, it’s possible to beat the market… maybe not every year, but definitely in the long run.  

    The Question

    Why is it so hard to beat the market?  The obvious answer is bad investor behaviour.  There’s the emotional stuff that either scares people into selling low or makes people greedy and results in them buying too high.  Then there are the brain issues like market biases, or beliefs of certain myths.  Typical human behaviour is really bad for returns.  

    Another destroyer of returns is lack of diversification and portfolio planning. Small investors are notoriously just winging it when it comes to investing.  They buy things like new AI stocks on a whim, without fully understanding their value or how they fit into their portfolio.

    Let’s assume that all of you out there – my Newsletter followers – are immune to those bad behaviours. You each: construct objective and logical portfolios; and use all of the rules that I set out in a previous post. Will you beat the market?  Not necessarily. But at the very least, you will achieve market-like returns and that is a very good start.

    I have been fortunate enough to beat the market by an average of 1.5% over the last 11 years, however it wouldn’t have taken much to average a return lower than this, simply by making a big mistake in the early years.  I also realize that luck can play a big part in returns.  That said, even without luck on my side, I should continue to achieve at least market-like returns as I build portfolios that resemble the market and economy.  I try to be like the market most of the time and deviate a bit when I think that I can squeeze more out of it.

    Let’s Think About it Like a Game

    You can think about investing like a game in which there are 2 players. Player 1 (small investor) can buy and sell anything they want, anytime they want, from anywhere on the planet. Player 2 manages a market ETF, such as the SP500 and owns all of the 500 biggest companies in the index.  

    It seems unfair that Player 1 (small investor) has total flexibility while Player 2 (ETF manager) is trapped within the confines of set rules and can rarely make changes to their portfolio of 500 companies.  The constraints for Player 2 continue as the amount of each company they must hold depends on how big they are.  So if Apple is worth 6% of the capital value of the SP500, he must own 6%.  He must also hold companies that are what one may consider “loser companies” – the down and out, old school companies like steel or trains. Also, the smallest of the 500 companies become very small as a percentage of the total portfolio, I mean really tiny.

    Player 2 also has limited access to international stocks, no small caps, no fixed income market, and no access to the thousands of ETFs that are available to the small investor.  So which player would you rather be?  It’s obvious, right?  So why does the small investor advantage not play out in the real world of investing?  

    Consideration 1

    Player 2 always has the big winners included in the 500.  They also have a disproportionate amount of the big winners simply because of the rules of the index.  Capital weighted indexes give more influence to big companies.  Will Player 1, with only a few picks, have any of these winners? Only if they are lucky.

    Consideration 2 

    Things get worse for Player 1. There’s something called market skew that makes winning harder. It means that returns across the index are not evenly shared among all stocks.  Average market returns only work if you have all the stocks.  If you don’t have all the stocks, then you must realize that the average return is generally comprised of a smaller number of companies with really big returns, while the rest (majority) under perform. Historically, about 1/4 of stocks over perform and 3/4 under perform.  Picking stocks randomly will likely cause you to under perform.  The odds are against you.

    Consideration 3

    With total flexibility, couldn’t Player 1 stock pick around the market Skew by picking the best companies? And would that not mean Player 1 would surely beat Player 2, as Player 2 must also hold bad companies?  While Player 1 is at it, he could also bet against the bad companies (short sell) and achieve even higher returns.  Its so simple!  Win on both sides.

    But it’s not that simple.  This approach doesn’t work; it’s been tried and tested.  So here is the problem: the world is a random place and no one can predict with certainty the future of even one company.  If you buy really good companies (which is really difficult to define), they are often expensive, so if things go wrong in our random world, prices can crater fast.  The advantage of a “really good” company washes out if you pay a normal to high price for it.  I know what you are thinking, “Ok so let’s find stocks that are really good but cheap.”. Hmm, everyone is doing that already.  Do you really have the skills to out think everyone?

    The same thing happens with down and out companies; they can all of a sudden turn around, get bought out, or discover a new type of widget that drives their stock to the moon. It happens all the time. The point here is that stock picking is really hard.  So it’s difficult to pick your way to success.  

    Being Different

    To be fair, it’s easier to beat the market when Player 1 happens to be in the right stocks at the right time.  Imagine that the SP500 index has stalled and small caps start to run up, or pick any other non SP500 group such as emerging markets or European stocks.  Being different than the SP500 is good in these scenarios, but consider that the SP500 has been a big winner for the last decade, so being different could have meant years of under performance because you expected emerging markets to outperform and you were wrong.

    A Word On Alternative Assets

    Ok, I know many investors cannot live without their bonds, Tbills, GICs, Gold, Crypto, Silver, collectible Cabbage Patch dolls, real estate, etc. These have had their moments in time, but the reality is that in the very long run, they don’t achieve the same returns as holding stocks. 

    Unfortunately, this means that having any of these will, in the long run, lower your returns and the result is underperformance.  There is an argument that some of these may enhance your risk/reward profile and that is ok if you feel that in a specific point in time its warranted (e.g.stocks are in a bubble), but the odds are generally against you over time, so you better be right in calling those, or at least be ok with lower returns.

    Last Word

    So why invest in individual stocks if it’s that difficult?  Why not just get a Market ETF?  To be honest, ETFs are likely the best answer for most people.  If you manage your own portfolio, you must put in a lot of effort and be a little lucky to beat Grandma’s market ETF.  But if you do, and your successful, those extra couple of percentage points can make a big difference over time and that is what this Newsletter is all about.

    Portfolio Update

    I am still behind the benchmark but I have caught up significantly from last month.  Oddly, on an absolute dollar basis, I am outperforming the market because of currency gains.  I always factor that out of my returns because I am measuring stock performance and not currency speculation.  Nevertheless, these are real dollar gains that I could put towards buying expensive Dijon Ketchup.

    Marc’s Monthly Moves

    No moves this month.

    Marc’s Portfolio YTD Performance

    • Portfolio return: 8.2 % (including currency gains)
    • Portfolio return: 5.0 % (without currency gains)
    • S&P 500 return: 6.9 %
    • RSP ETF S&P equal weight 2.9 %
    • TSX: 4.8%

    The portfolio is under performing the SP500 by 1.9 % points.

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  • I’m Under Performing… Again!

    March 2024, Newsletter

    As some of you know, I travel almost half the year in my van with my wife (Nat) and dog.  Mostly to Mexico but we have been to Guatamala many times.  We are basically snowbirds (Nat objects to that description); once January comes along we leave snowy Quebec, Canada and drive south until it gets warm again.  Keeping this newsletter going on the road can get tricky as tropical climates, inviting swimming holes, and bad internet connections become big distractions. 

    Investing While Travelling is Complicated

    Similar to last year, my trading account locked me out because I forgot to add my temporary Mexican phone number to my trusted multi factor security list.  Luckily most of my trading had already taken place earlier this year.  So wasn’t the end of the world as I didn’t need to make any trades. In fact, I do prefer to do nothing for as long as possible.  The only drawback to this situation is that I could not see how the account was doing versus the rest of the market.  

    Now that I am back in the southern USA and back into my account, I can see that the portfolio has continued to fall behind my SP500 benchmark. So it has been a miserable start to the year.  In my last newsletter, I outlined how I have changed the portfolio to lower risk and did expect that the portfolio would likely underperform going forward – so I guess this shouldn’t be a surprise.

    Strategies & Risk Vs Reward

    In investing it makes sense to lower risk, but at the same time, it’s all about returns. If you are going to chronically underperform the market in order to avoid all risk, what is the point in investing? You have to be strategic and try to avoid certain market risks even if it means under performing for a while. The hope is that you can more than make it up later. Alternatively you could invest in market ETFs and get market like returns and accept the associated risk.  No one ever got poor that way.

    There is an expectation that by setting out really clever strategies that my portfolio will eventually outperform or at the very least achieve a lower return but with a better risk-return ratio.  In other words, underperform but with much less risk.  This unfortunately is hard to quantify with numbers. It’s really difficult to prove you made the right choice, especially if the market risk never shows up.  It’s like fire insurance, you buy it when the risk is high, but if there is no fire, was it a bad decision? Was not having insurance in a bad fire year a prudent decision?

    My current less risky portfolio was built with the idea that it could outsmart the market by shunning those big 7 magnificent stocks and associated sectors that have been driving the market just before they start selling off.  That is the plan, but getting the timing right is almost impossible. This strategy could take a while to pan out, but I have recently observed a change in the market that supports my assumption that the magnificent 7 will stop leading. Technology, and communications have been consistent winners in 2023 and early 2024, however in the last 30 days this has changed, as highlighted below.

    Sector returns, year to date (YTD) 2024

    As you can see below, the market is being led by only a couple of sectors. These sectors have become expensive, which can’t continue forever. This is what I’m risk-proofing against.

    • 12.45% Communications
    • 12.14% Information Technology
    • 8.14% Financials 
    • 8.10% Energy
    • 7.98% SP500
    • 6.74% Industrials 
    • 6.66% Health Care
    • 5.59% Materials
    • 5.02% Consumer Staples
    • 2.37% Consumer Discretionary
    • -0.80% Utilities
    • -3.0% Real Estate

    Note that the top 2 sectors are the same ones that led in 2023.

    Sector returns for the last 30 days

    In contrast to the list above and as per my earlier statement, the leaders have changed away from the technology/communications sectors in the last 30 days.

    • 9.47% Materials 
    • 8.94% Energy
    • 5.25% Financials
    • 5.04% Utilities
    • 4.96% Industrial
    • 4.22% Information Technology
    • 3.98% SP 500 
    • 3.59% Consumer Staples
    • 3.42% Real Estate 
    • 2.38% Consumer discretionary
    • 2.08% Communications
    • 1.88% Health Care

    From my perspective, this change in sector leaders means there is hope for a long term rotation away from the usual leaders to, well, anything else.  This would certainly be beneficial to my portfolio.

    Can I Take the Pain?

    In the professional money management business, if you’re a fund manager and you underperform for a year or more, you will likely lose your job.  It starts with investors pulling their money out of underperforming funds so they can chase higher returns elsewhere.  The problem is that this behaviour is bad for everyone. Most of the small investors are chasing heat, in other words trend following. Ultimately buying high and selling low.  The fund managers are always under pressure to at least perform in the average to avoid getting fired.  This means keeping a boring portfolio of what every other manager holds. Sticking one’s neck out in this industry is dangerous if you happen to be wrong for any significant amount of time.

    As you can see the small investor who manages their own portfolio has an advantage in that he/she is not going to get fired for under performing for a while.  Let’ be honest, however, underperforming is not fun and there’s still pressure to do something when everyone else is getting rich and you are not. There is only so much pain one can take before they need to consider that maybe their strategy is flawed somehow.

    This is likely the feeling Warren Buffett had when he refused to invest in tech prior to the great tech run up and subsequent fall in the 2000s. Those stocks were simply too expensive to him, yet prices just kept going up and up.  He was eventually proven right.  Are we in the same boat now? It’s never exactly the same boat, and that is what makes it difficult to judge.  Tech is expensive, but not crazy expensive, and not all of the sector is expensive.

    Hold the Line

    My strategy for now will be to continue to hold the line – even if it’s a bit painful. I will let it play out.  There is some evidence that things are changing, although it’s super early.  The best investors in history were often those who did not follow the market cycle off the cliff. They were those who bought companies that were totally out of favour, in areas that were considered un-investable to many. They bought positions that kept falling while amateurs bid up companies that had no earnings. Those investors often looked bad for periods of time until the market pendulum swung back in favour of those out of favour stocks. Once that happened, long term over performance was the name of the game.

    Is There a Plan B?

    At some point the pain may be too great.  You should always be ready to admit you were wrong and adjust accordingly.  Especially if the pain becomes chronic.  If that’s the case, the plan would be to become more market like.  This would be simply accomplished by rebalancing to the market weight of the index and buying a bunch of market leaders like MSFT and AAPL.  Although boring, it would be a safe and good position until a new strategy can be developed.

    New Positions

    I have started to pick up some more speculative positions.  These are really small and not really relevant from a size perspective.  I am using some spare cash that accumulates in the account to pick these up.  I just need one to take off, even if most of these positions end up dead. As I have said before, every portfolio should have a speculative section of 2-3% total weight.

    My new positions are:

    • Small position in LIFT.V – a small Canadian resource company developing a lithium property.  The market cap is $148 M – very risky therefore I took only a very small position.
    • Small position in LMN.V – Lumine Group a Canadian software company that was spun out of Constellation Software. It’s a speculative position with medium risk. The market cap is $2.5 B.

    Marc’s Monthly Moves

    Sell

    • Nothing this month

    Buy

    • LIFT.V
    • LMN.V

    Marc’s Portfolio YTD Performance

    • Portfolio return: 6.1 % (including currency gains)
    • Portfolio return: 3.8% (without currency gains)
    • S&P 500 return: 7.28%
    • RSP ETF S&P equal weight 4.2%
    • TSX: 4.25%

    The portfolio is under performing the S&P 500 by 3.48 % points. Boo!

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  • Another Rebalance of the Portfolio?

    February 2024, Newsletter

    In follow up to my last newsletter I have in the end done a complete rebalance of the portfolio. I also added 2 new stocks and sold off 2 others.  There is allot going on this month!

    Why Rebalance 

    There are many reasons to rebalance.  The most  simplistic reason is to ensure that no Sector in your portfolio gets out of line with the market wether too big or too small.  This is also true at the individual stock level as well, my apple position as an example was bought in 2012 and has grown to 11 times its original purchase price.  Had I not paired it down on a regular basis over the years it would have become the largest stock in my portfolio by far.  My returns would depend on one stock alone which is not prudent risk management.  

    Another reason to rebalance is to strategically make Sector bets, in other words to purposely overweight/underweight sectors with the idea of outsmarting the market.  Very hot sectors like technology become expensive and risky, so why hold market weight when there are cheaper stocks waiting to have their turn.  The idea is always buy low and sell high even though these stocks can be out of favour for a while.

    It was also time to unwind the last strategy, mostly because it was based on the big market drop in 2022. The market has recovered since then and the sectors and stocks that I added at that time have mostly done super well. I am likely too early with these changes but its time to move on.

    House keeping is another portfolio task where sometimes a small position you thought was going to pay off does not and even loses money.  These can become irrelevant with time.  Having too many stocks in a portfolio can be a time waster and also limits your upside.  Same goes for positions that exceed 5% of the portfolio.  Time to pair these down and lower your risk.

    I usually do not like rebalancing too often because it often works against you.  I generally like to set up a portfolio and sit back as long as possible.  The problem is that the market is always evolving.

    The New Strategy

    Developing market strategies is difficult.  No one knows what the market will do for certain at any one point in time or more specifically which stocks will go up, which will go down.   Any strategy needs some basis in logic, for me, human psychology is a great place to find strategies as the market moves on human sentiment such as fear and greed.  Any big move that is purely emotional like a crash for no apparent reason is a good opportunity to bet against the herd. 

    2024 is a less obvious year to set up strategies.  I suspect that its likely going to be a bumpy ride yet finish positive.  That being said, I want my portfolio to be bullish, yet not as bullish as last year’s version.  Gone is the 3% leverage and the overweight Communications Sector.  My strategy is simply to underweight (a bit) the very expensive areas like Communications and Technology.  As well as overweight beaten down areas like Utilities and Financials to a lesser extent.  

    The other part of the Strategy is the country breakdown.  Understanding that the world is a big place, diversifying across countries is truly a great method to lower your risk with little to no difference in longterm returns.  USA stocks have been on fire over the last few years.  Typically this is not usually the case historically.  If you believe in reversion to the mean, which I do, you can imagine that other countries will either catch up, or alternatively the US markets will fall back down.  In any case, the argument is that there are cheaper alternatives out there to US technology.  As it stands, I currently have a USA/CAN/Foreign breakdown of 41/36/23 respectively.  Noting that most World ETFs have USA weighted at about 60% or more.

    The Issue with Strategies

    All strategies are deviations from the market.  Returns will therefore be different, either good different or bad different.  The amount of return really comes down to how far one deviated and how correct your assumptions were. There are so many variables at play including luck that it does not take much to make you a loser or better, a winner.

    What could happen in 2024?

    Maybe nothing; the market can simply continue its crazy concentrated 7 stock charge with Apple and Microsoft alone representing about 10% of the market weight each.  This is what in fact the market has done in January.  As a result the new strategy is already underperforming!

    Another possible outcome is that the entire market could rise while the Magnificent 7 stalls.  This will result in the portfolio outperforming. This is what I am hoping for and often happens historically.

    The economy could also fall into a recession causing a moderate to strong fall in the market.  The portfolio would likely outperform in this scenario.

    International stocks could outperform USA stocks.  If so, then the portfolio will outperform. 

    Rates could fall.  The portfolio outperforms a bit.

    Maybe a different market rotation might occur, maybe small caps become the new thing.  The portfolio would miss out and may or may not outperform.

    As you can see above, there are all kinds of situations that can affect a portfolio.  These are just the big ones, there are all kinds of forces known and unknown that will determine the future.  That being said, if you want to outperform but not lose your shirt, you cannot stray too far from the Market. This is why I am careful with the Portfolio. If I am wrong, parts of the portfolio will still do reasonably well and hopefully I can make up the difference in another year.

    Will the New Strategy Work?  

    Not at the moment. Maybe later? That is the thing about investing, you may have a great strategy but it simply could be wrong or just have bad timing.

    I am hoping that now that the market is back at its highs that other parts of the economy will lead.  If this is true then the portfolio will outperform.  Either way, I believe its best in the long run to stay well rounded even if it costs a few points of performance.

    Tactical Changes

    Many of my changes to the portfolio this month were simply rebalancing from one area to another.  However, I have taken 2 new positions and added to one of my existing positions:

    1. Norsk Hydro a Materials stock that replaces Omega Flex.  This company is a boring, big, old, foreign (Norwegian) aluminium producer, pays a good 8.3% dividend and out of favour. 
    2. Axos Financial adds to my financial sector.  Its a small cap USA bank, scores really well on most screeners.  The idea here is that financials will continue to be out of favour but in the long run they will do well in a higher interest environment.
    3. Fortis (FTS) a Utility which I took a small position in a previous Newsletter is now a much bigger position.  I actually doubled the SP500 weight of 2.36% for utilities and own about a 5% weight.  If you recall Utilities are interest rate sensitive, so should rates fall, Fortis will do very well. If nothing happens to rates, then I will continue to get 4.3% dividends well as any annual increase in dividends. Should rates increase, the stock price will likely fall. So this pick is mostly about rates.

    Marc’s Monthly Moves

    Sell

    • Omega flex (OLFX) -10% return
    • TD 50% return
    • Netflix (NFLX) 52% return

    Partial Sell  

    • Apple (Appl) 1000% return (not a typo)
    • Shopify (SHOP) 83% return
    • Intel (INTC) 67% return

    Buy

    • Axos Financial (new position)
    • Norsk Hydro (NYHYD) (new position)

    Buy more of

    • Google (GOOG)
    • Fortis (FTS)

    Marc’s Portfolio YTD Performance

    • Portfolio return: 3% (including currency gains)
    • Portfolio return: 1.32% (without currency losses)
    • S&P 500 return: 3.96%
    • RSP ETF S&P equal weight: .22%
    • TSX: .6%

    The portfolio is underperforming the sp500 by -2.64%. But thankfully, it is doing better than the Canadian index, the average Sp500 return and the average international indexes.

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  • Marc’s 2023 Annual Performance Review

    January 2024, Newsletter

    The end of the year is always a great time to reflect on one’s life and even more importantly, one’s portfolio. In a nutshell, my portfolio returned 21.86% but surprisingly, it did not beat my SP500 benchmark (24.23%), which is always the goal.  Thankfully, I lagged the market only by a small amount (2.37%). To be fair, you actually have to add about 1.5% of market dividends to the SP500’s 24.23% to get a total return of about 25.73%.  This means I lagged 3.87% in total, not what I expected, but also not terminal.

    If you follow this Newsletter (which you should) you would know from previous editions that the market is very weird and driven by very few big name stocks.  So investors were at a disadvantage in trying to beat the market in 2023.  That being said, the risk associated to that weird concentrated market is much higher than what it appears.  So to end up just shy of the SP500 return with a much safer portfolio is worth something. In other words, sometimes you’re better off under performing a bit in order to lower your risk.  Its simply a better longterm approach. All in all, a 20 plus percent return is still a really good result, so I feel pretty happy about that.

    Strategy Changes for 2024

    As you can see from my “Monthly Moves” below, I have made some big changes and will likely continue to make a few more next month.  For the most part, I have unwound my previous strategy, in which I overweighted the Communications Sector and over leveraged the account. The right time to undo a strategy is tricky, but since the SP500 is near its all time high, I figured that this would be a good a time as any.

    In addition, to unwinding the old strategy, I have started to position the portfolio to reflect the fact that there are some really expensive US sectors (Information Technology, Communications, and Consumer Discretionary) within the market.  The idea is to underweight those areas a little and become heavier in the cheaper areas.  The risk is that the expensive sectors could continue to become even more expensive while cheaper sectors do nothing or even fall. Craziness can surprisingly stay in a market for a long time. I will also continue to underweight US stocks, and overweight Canadian and international stocks.  While I’m at it, I’ll also do some house keeping and get rid of some really small positions, or positions that no longer align with the broader new strategy.

    The Details

    I have increased my Financial Sector by buying more Bank of Nova Scotia (BNS), which is an out-of-favour Canadian bank.  I have also significantly reduced my TD Bank (50% return), mostly because it has been falling in consumer satisfaction.  I plan to eventually be overweight in Financials.

    I have sold Shell (94% return) and am now mostly nuclear with Cameco (CCJ) in the Energy Sector.  In the future I may invest in an alternative energy stock.  I still think that oil stocks will eventually rebound and are not going away any time soon, but in my view, nuclear has a better future.

    I have sold off some smaller positions that were part of older strategies.  This includes Meta (96% return) and Delta (small insignificant gain). 

    I sold VOX ETF (45% gain), which was the main focus of my successful Bear Strategy.

    You may have noticed that I have not even added one new position for all these changes, but have instead only added to existing positions. Next month, I should be finished with all the changes, but again, will likely not be adding many new positions.  Its how the portfolio is structured that is more important than the individual positions after all. I plan to provide the breakdown of the final portfolio next month.

    How did you do? Was is it a good year?

    Marc’s Monthly Moves

    Sold:

    • Delta Airlines (DAL)
    • Shell (SHEL)
    • META
    • 1/2 of TD bank (TD) 
    • VOX ETF

    Bought:

    • More Bank of Nova Scotia (BNS)
    • More Archer Midland Daniels (ADM)
    • More CBRE

    Marc’s Portfolio End of Year Performance

    • Portfolio return: 19.6% (including currency losses)
    • Portfolio return: 21.86% (without currency losses)
    • S&P 500 return: 24.23%
    • RSP ETF S&P equal weight 11.72%
    • TSX: 8.12%

    The portfolio underperformed its benchmark by 2.37 points. When dividends are included (1.5%) in the SP500, which they should be, the portfolio under performed 3.87%.

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  • Crystal Ball Stock Projections for 2024

    December 2023 Newsletter

    Although the year is not over, with less than a couple of weeks left, its likely that 2023 will end up a very strong year.  As of this writing the SP500 has achieved about 23% return which in fact is a typical bull market return. The Canadian TSX on the other hand did not have one of its better years, but at least its now in positive territory. My hobby portfolio which is the basis for this newsletter will likely be just shy of the SP500 return. I will tally up the official results in next January’s Newsletter. 

    What Are My Predictions on 2024?

    Lets first look back a little to see where we came from which may help us predict the future.

    If you recall, late last year (2022) I had projected that the market was going to run up and that 2023 was going to be a strong year. I do like it when I am right.  To be honest, I am simply playing probabilities, no magic here.  Getting back to back bear markets (a bear market is a negative return of 20% or more) is extremely rare.  So betting against one was simply taking advantage of the past market behaviour. 

    In fact, most people had the opposite view at that time, even high paid analysts were all projecting negative or no returns for 2023. Generally, the herd of analyst almost always gets this wrong. They tend to bunch together because there is safety in numbers. No one wants to go on a limb because outliers of the herd get fired.  Since this is a hobby and not a job for me, I cannot get fired so I can actually tell you what I think.

    Knowing that 2023 was likely going to be a good year meant that I could actually create a strategy where I could 1) leverage the account slightly (loan against my margin) and 2) load up on a big losing sector (communications).  Big losers in a bear market always bounce back the most. This is a simple approach that almost always works.

    My bear market strategy was the right one.  The Communications sector over performed in 2023, and the market was up strong.  But even getting this macro view right did not provide the big market beating results I was expecting.

    So What went wrong?

    A large chunk of the SP500 gains came from just a few (7) companies, aka Magnificent Seven, concentrated in just 3 sectors.  Further, Canadian and international stocks under performed the SP500.  This meant that my very diversified portfolio was at a big disadvantage by being under weight US stocks. Luckily the portfolio has still done relatively well.  Almost everyone I know (except one, you know who you are) underperformed, mostly for the same reason.

    This is a good example of how the market can still embarrass you even when you have a winning strategy.  I still got a market like return which in a sense is kind of the main goal. Ultimately its not the end of the world and I should be happy with this return.

    Back to the 2024 Predictions

    Lets start with what everyone else is saying now. Most analyst are predicting a 10% return, remember they got 2023 really wrong. A 10% return as I have said in the past is extremely rare.  Its roughly the long term average return of most equity markets.  They may as well be saying : “I have no clue, d’ont fire me”.

    What do I think about 2024?  First off, projecting what the Stock Market is going to do is super difficult. For the most part no one really knows for sure, otherwise if you did, you would eventually own the planet. Generally, predictions are really more for fun but sometimes can still provide some basis for some light strategies.  

    I realize that returns will depend on things like  wether we get a recession or not, earnings, interest rates.  In addition, I also am a believer in the US presidential cycle which indicates that year 4 of the cycle is generally positive for the market. Then there is the Inverted yield curve which is strongly suggesting a recession.  Last but not least, most people are not aware that the market is up way more often than it is down. So simple probability favours a positive outcome in the 70% range.

     As you can see there are many forces acting on the market in both directions like a tug of war.  There are also forces that could show up that we do not know like space aliens, nuclear war, global freezing. This is why, generally, its more of a game and any predictions should be taken with a grain of salt.

    That all said, my guess, is that 2024 will likely end up pretty good but volatility will be again a factor.  I predict mid teens with lots of volatility.  I feel that the market is too pessimistic and that will surprisingly drive the market higher at least for the beginning of 2024.

    Strategy for 2024

    I still expect some rotation in what will lead the market.  The magnificent 7 can not lead forever.  It is very difficult to time these things, so the best strategy is to not abandon those 7 stocks, but also not rely on them.  I always want a bit of everything as to have some winning players in the portfolio at any one time. As I said above, “stupid” can stay in the market for a long time.

    Tactical Changes

    I will likely undue last year’s strategy, firstly by getting rid of my 3% leverage (small) and by selling off my VOX ETF to bring down my Communications sector to underweight from overweight.

    I have already reduced my USA exposure which has worked against me in recent performance but I gained in knowing that my risk level is lower than that of the market.  This approach will continue in 2024.

    I suspect financials will start to run up as they tend to do well in higher rate environments.  That also means that the Canadian market may have a stronger return than the US considering that its overweight financials.  I will also look at the bottom performing sectors as they are the most unloved and have a greater potential for a rebound.  Utilities, Energy, Consumer Staples and Health Care were all negative this year.  I have already added my first Utility to the portfolio (see my October Newsletter).  I will likely add to this position and consider adding some weight to the other loser sectors.

    Its tricky trying to guess which part of the market will do well next year.  Not only do you have allot of losers and under performers to choose from ie foreign, Canadian Market, Emerging Markets, small caps, mid caps, Value Stocks, most sectors that are not Information Technology or Communications, most stocks in general that are not the Magnificent 7 in the sp500.  

    At the very least if there is no rotation next year and your well diversified, you will likely again under perform a bit, but at least your risk/reward profile will be much safer by far.  

    What about ETFs?

    Another good year for ETFs.  If you follow this blog, you know there is a reoccurring theme here.  I normally suggest that small investors have 3 different market ETFs, one for your own country, a US ETF and an international ETF (less USA).  This would be the smart way to approach it.  Depending on how you combine these, you likely returned somewhere around 13-15% with lots of safety and without raising a finger. You likely have done better than most small investors. If you are american and you have almost all your investments in US companies as most do, then you really hit it out of the park (this time).  If you are 100% Canadian invested, you likely do not follow this Newsletter and your kicking yourself with despair…again…sorry. If you are a worldly type and do not care to be biased to your country then you could be holding an all in one world ETF like Vanguard’s VT  or Black Rock’s URTH which returned 18% and 20% respectively.

    Marc’s Mistakes:  

    I try not to have too many mistakes and when I do, I have to make these public to temper my ego. So here it is: I noticed recently that my Communications ETF VOX was underperforming the benchmark. Weird? It is providing an almost 40% return, but the benchmark is almost at 50%.  When originally searching for an ETF product I did notice that VOX ETF had a bit more tracking error as it was not entirely exactly the same as the benchmark. Its lower fees drew me into accepting a good enough situation.  On a big run however, the error played against me. Every dollar counts when measuring performance and I feel that I left some behind with this pick. I will be more careful next time.

    Marc’s Monthly Moves

    • Sorry no Moves

    Marc’s Portfolio YTD Performance

    • Portfolio return: 18.9% (including currency losses)
    • Portfolio return: 20.1% (without currency losses)
    • S&P 500 return: 22.9%
    • RSP ETF S&P equal weight 10.7%
    • TSX: 5.9%

    The portfolio underperformed its benchmark by 2.8 points.

    Note that the RSP ETF has increased 7 % in a month outpacing its weighted SP500 sibling.  Meaning that the overall market not just the Magnificent 7 is participating in the move up. This is a good sign.

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  • Is It Time to Get Back Into Fixed Income?

    November 2023 Newsletter

    The answer is unfortunately “not really or not yet?”. I historically am not a big fan of fixed income mostly because it would likely lower my returns in the long run.  I do understand that the credit market (fixed income) is a big deal and there is certainly a place for it.  In the small investor world, fixed income is fine for short term needs i.e. you will be buying a car in the next year or two and you will need cash.  Before we go too far, lets discuss what fixed income is to the small investor.

    Fixed income 101

    Fixed income conceptually is simple, lend someone your money and they promise to pay you back all your capital sometimes in the future, with interest.  You will find fixed income in many forms but they are all basically the same.  Most people are familiar with lending their money to their bank, known as Term Deposits or Guaranteed Investment Certificates (GICs).  Also popular, are Treasury Bills (short term) and Treasury Bonds (long term) which are basically loaning your money to the government. You can also loan your money to other organizations such as municipalities or corporations aka municipal bonds and corporate bonds respectively. You can even invest in Exchange Traded Funds (ETFs) based on certain types of Bonds to make it even easier.

    Once the borrower is established, then one only has to choose the duration of the term which can vary from a few months to over 30 years.  Returns are based on prevailing interest rates as well as time and risk.  Generally higher risk and longer durations pay better returns.  The government Treasury Bill or Bond for instance is considered risk free because of the reliability of the government.  A bond issued by Bell Canada or Verizon will have a higher yield than a government bond simply because they are more risky.  

    There Are Risks!

    Default is the biggest risk which is well understood. A more subtle risk which most people are less aware of is the relationship fixed income has with interest rates. Its an inverse relationship, rates go up, and investments like bonds go down, or vice versa. Only when you hold a 5% bond all the way to maturity, lets say for 20 years, will you return exactly its promised 5% yield.  However as rates rise and fall over those 20 years, the value of the bond will also rise and fall quite substantially. The market for fixed income is derived from the supply and demand of existing and newly minted bonds.  Example, If interest rates go up and newly minted treasury bonds pay more than the one you originally bought, supply and demand will force your bond to lower in price.  Its the only way that your bond can stay competitive in the market.  Why would I want to buy your bond paying 3% when I can buy the same exact bond paying 5%.  But if you lower your price down enough so that the resulting return is the same, then were good…you get the idea.  The rise and fall in bond value is much greater on longer duration bonds and much weaker on short duration.  Big swings in interest rates can be very destructive to bond holders or alternatively provide a big payout, all depending on the direction of rates. This effect is also seen in rate sensitive investments like utility stocks, Real estate Investment Trusts (Reits) and big non growing dividend payers.

    Another risk people do not often realize is that fixed income generally under perform stocks most of the time (using rolling 20 year averages).  For the few times that fixed income outperform stocks, its not by allot. This is important because even slight differences in returns over very long periods say 20-40 years will have huge impacts on the amount of money you retire with. Retiring poor is a real thing, a risk.

    Is inflation a risk?

    Inflation is another factor that wrecks havoc on fixed income.  Don’t get me wrong, it affects all asset classes, its always and everywhere like gravity.  The problem for fixed income is that as mentioned above its generally a relatively poor performer.  As a result, inflation affects poor performers more than strong performers. In the last few years, after inflation, fixed income returns where actually negative.  You simply need more performance otherwise the road to retirement can take years or even a decade longer.

    What are the benefits?

    Well, not many. But in the very short run they are less volatile than stocks.  They are also less correlated to the stock market which means that a portfolio holding both of these assets are a little less volatile as a whole. For those who like to hold cash in their portfolios (bad idea) fixed income is better suited to hold value until its needed. The “appearance” of lower risk also provides small investors a better ability to sleep at night.  

    Will I invest in Fixed Income?

    Absolutely not.  I play a long game where its in my best interest to stay with better performing stocks. Yes in the short run, fixed income can out perform and even sometimes in the long run (rare), but no one knows when and for how long.  Very long run returns for stocks are generally known to be between 9-10% while fixed income is around 5% give or take.  The difference can narrow substantially depending on what part of history you are measuring.  Nevertheless, stocks almost always win in the long run, so it rarely makes sense to invest in fixed income. The few benefits simply do not make up for the underperformance. I get allot of slack for this view but its all verifiable.

    What If….

    Ok, never say never.  What if returns on fixed income increase to 15% while stocks languish.  Well, I may be convinced to adjust the strategy in the short run.  Small investors have to stay nimble as market dynamics change. I had come across a few smart investors in the 80s who locked in 18% bonds and as rates fell back, their bonds skyrocketed in value. Under the right circumstances, an adjustment of strategy may be beneficial.  

    So what now?

    In fixed income, interest rates are almost all that matters.  With rates at 4-5% a drop back to zero would benefit anyone with a portfolio full of long duration bonds.  But should inflation persist which requires rates to rise, then that same portfolio will lose value quickly.  If you don’t care about values and plan on holding your bonds till expiry in lets say 20 years, then it doesn’t matter as you will receive your money back as well as 4-5% interest per year as expected.  So for me, rates are simply not high enough to get me into bonds.  How high do they need to be?  That is a difficult question, but I suspect I would be much more interested if rates were over 10%.

    So where are Rates going then?

    In economics there are always many forces trying to move the economy, lots of moving parts.  Inflation is going down which suggests that rates may be lowered soon. Also the yield curve is inverted meaning the market is not expecting rates to remain high.  You get less return the longer you go out on the bond term which is counter intuitive, its almost always higher. It also means that a recession may be ahead, or at least a slow down is coming.  The inverted yield curve is generally a good indicator of recessions, but is not always right.  The moral of the story is that generally rates are expected to fall, but no one knows for sure.  In my experience strong trends in rates tend to last longer than expected.  This means that I would not be surprised if rates stay in the 4-6 % range for a couple of years.

    Driving the point home

    This is a sort of a real story about investing in fixed income related to my parents.  I was asked by my mother to set up a fixed income ladder for money she inherited from Grandpa.  A ladder in this case, was simply staggering 5 term deposits, one due every year for the next 5 years.  Meaning there was always a term due every year, and those funds were usually reinvested to keep the ladder going.  It took advantage of longer durations and did not tie up all her money.  My mom hated risk.  

    Dad on the other hand was good with risk, he once owned a motorcycle and a race boat. He had invested his own money in lousy stock mutual funds.  Over 30 years later, my dad had significantly outperformed mom even with a not so well thought out investments.  It was quite surprising, although dad started with a little less than mom, he finished with likely 3 times more.  As I recall, earlier years saw their returns much closer, and Dad had some bad years from time to time but as compounding continued and rates kept falling mom’s returns lagged more and more.  Some of Dad’s good years were really good, for example in 2013, my dad returned over 20% while my mom gained a mere 2-3%. This real life example shows how being too conservative can actually be counter productive to achieving ones financial goals.  Thankfully my mom and dad’s approaches averaged out to something still somewhat acceptable.  But what if my mom was alone?  She would have definitely had to eat cat food in her old age. 

    Marc’s Monthly Moves

    • Sorry no Moves

    Marc’s Portfolio YTD Performance

    • Portfolio return: 18.9% (including currency gains)
    • Portfolio return: 17.7% (without currency gains)
    • S&P 500 return: 17.6%
    • RSP ETF S&P equal weight 3%
    • TSX: 4.08%

    The portfolio is once again neck and neck with the SP500 after a strong run up.  There is definitely some rotation going on in my favour within the market. The currency gain is also nice, but I do not count it, as performance goes.

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  • I Just Bought a Utility Stock… Should You?

    October 2023 Newsletter

    Did I really buy a Utility stock? Yes, I did! Good investors must be able to adjust their approaches as the market evolves.  For the last decade, I avoided utilities because I figured that they were at risk due to historically low interest rates.  Interest rates were bound to reverse any time… said me ten years ago. I was recently proven right, but was it a good strategy to avoid an entire sector for a decade? Maybe not.

    Are Utilities Bad Stocks?

    There are stocks I typically do not invest in.  A good example is Gold stocks; they are bad investments with low average returns, long wait times, etc.  Then there are forestry stocks, which I refuse to buy because I like trees and do not like how these companies manage forests.  You might think that the utility sector would be in the same permanent penalty box. Unlike my other 2 examples, there is nothing inherently wrong with utilities other than their sensitivity to interest rates.  Every sector has their own characteristics, some good, some bad.  There is no reason to exclude these for such long periods of time from a portfolio.

    Utilities 101

    Let’s start at the beginning for those of you who may not know what a Utility stock is.  For the most part, utilities are exactly what they sound like when you think of paying your bills: electricity, natural gas, water, sometimes sewage, garbage disposal, and recycling to some extent.  The big players however tend to be energy related.

    Utility companies generally do not have a lot of growth. They simply sell you electricity (as an example), make a profit doing so, and then share most of it with their shareholders, reliably, year after year.  The model is simple, yet kind of old world restrictive.  Unlike Google, which simply rents office space for its employees, utility companies must build and maintain very expensive and complicated infrastructure to operate their business.  Business expansion occurs slowly as the companies generally have to borrow to raise capital; its not an easy business and is often government regulated, which caps profits.

    You do not hear much about them in the news because they represent less than 3% of the SP500 index.  They are a small boring player in the economy so it’ easy to forget them.  You can see why I avoided these for so long.

    Why Are They Like Bonds?

    Since Utility stocks pay reliable dividends and don’t grow very much, their stock prices act much like bonds. They are not all that different, especially if there is little business growth.  As I have said in the past, stock prices are a function of supply and demand, always.  If interest rates go up to today’s 5% level for example, then your reliable utility dividend rate of 3% is no longer competitive against a risk free bond. Why would anyone take a risk on a company with no growth offering 3% when you can get 5% risk free? Their stock price must fall drastically so that the dividend yield becomes competitive again. Simple economics.

    Performance

    As it happens, Utilities are the worse performing sector in the SP500 index this year (-14%), they were also the worst (-17.7%) in 2021.  It’s mostly because of rising rates. See Novel Investor image below for the latest sector performance for the last 15 years.  Be aware that it’s not all bad news, they have had some very good years.

    Relative to other sectors, Utilities rank around the middle.  While the SP500 returned 8.8% over 15 years, utilities returned 7.4%.  If you take into account risk and some pretty bad recent Utility Sector returns, overall that’s pretty good.  Information Tech on the other hand returned 13%, which is amazing, but it has become a very expensive (read risky) sector. Its’ oversized effect on the average SP500 return is also worrisome. If you took the information Tech sector out of the index, Utilities would likely be neck and neck with the average. 

    Was Shunning Utilities the Right Strategy?

    If rates started rising years ago, then certainly the “shun utilities” strategy would have been dead on.  Investing is all about probabilities and not certainties, there is always a great deal of randomness involved. Even if something is likely to happen (rates go up soon), they simply may not.  Nothing is certain, just different levels of probability. You’re best to play the odds, knowing that you can be wrong sometimes. This is what makes investing interesting.  How often does one of your good for nothing stock picks double or triple, while your highest conviction “sure thing” pick drops in half? Happens all the time.

    Time to Buy?

    So is it time to buy Utilities? Honestly, I do not know. Simply speaking, you would need to know where interest rates are headed.  If you knew that, you could bet everything you owned and become super wealthy. No one really does this because no one really knows, and neither do I.  What I do know is that rates have climbed from basically zero to about 5% – the highest levels in 16 years.  That is huge and the utility sector has been devastated.  But just because rates have gone up a lot, it does not mean that they can’t continue going up.  Rates were increased to about 20% in the early 80s to combat inflation, a similar situation is happening now.

    The New Strategy

    So my reasoning for buying, rightly or wrongly, is that lots of risk has been removed from utilities. Could rates go up and continue pounding utilities? Yes.  So I have taken a half position with the idea that if rates keep going up and utility stocks keep falling, I will simply buy more until I achieve a 3% portfolio weighting.  There are other less obvious but more important benefits for making the purchase. In my case, I have to consider portfolio management where diversification plays a key role in returns.  The purchase increases diversification with the side benefit of lowering overall volatility. In addition, Utilities in the right context make a great defensive position should a recession come along.

    Ok, So Which One?

    After looking at hundreds of utilities stocks, I have to say that generally these are not the kind of companies that I would historically invest in.  There are high yield 6-10% companies that are in my opinion “attractive but dangerous” because they have too much debt and are suffering from high borrowing rates.  Most of the companies have very little opportunity for growth and those who have growth, are more expensive.  You kind of get what you pay for in Utilities.  My advice is that in the long run, you’re better with a lower yield (under 6%), a bigger company, some growth, increasing dividends annually, long history of dividend payments.  These companies fared much better than other lower quality companies with bigger initial yields and as such, prices reflect that.

    I eventually bought Fortis (FTS), a Canadian company that provides electricity and gas to customers in Canada, USA and the Caribbean.  It’s a big player with a 26 billion market cap, and is considered the gold standard in Canada. It’s not particularly cheap, but it has growth opportunities which makes up for this. Its dividend yield is 4.4 % and has been increasing these annually for the last 50 consecutive years. In the short term, dividends are expected to grow at a rate of 6% per year.  If you’re into Beta (a volatility measure), it scores a super low 0.23.

    Something Has to Go

    With a new sector being added to the portfolio, something had to be paired down.  My energy sector positions have done so well that they became overweight. It makes it easy to move around money when this situation exists.  While I was at it, I sold off MSOS a speculative Marijuana stock  (small position) which did not work out, as well as a small cap ETF (VSS) which is too small to be relevant.

    Marc’s Monthly Moves

    • Sell half of Shell (SHEL) (+103% return)
    • Sell MSOS (-73% loss)
    • Sell VSS (+7% return)
    • Buy Fortis (FTS)

    Marc’s Portfolio YTD Performance

    • Portfolio return: 9% (including currency gains)
    • Portfolio return: 7.8% (without currency gains)
    • S&P 500 return: 10%
    • RSP ETF S&P equal weight -3%
    • TSX: -1.4%

    When Will this Under Performance End?

    The portfolio has under performed the S&P 500 by 2.2% percentage points.  I always get concerned about any deviation over 2%.  Since I have moved further away from a USA heavy weighting, I believe that I am at a disadvantage to keeping up with the index.  As long as a few very expensive market leaders continue to lead, I will likely not be able to keep up.    The consolation prize is that the portfolio is less risky.  It will likely over perform when the market finally realizes its wicked ways.

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  • Are US Stocks Too Expensive? 

    September 2023 Newsletter

    In my August 2023 Newsletter, I discussed the problem of Market Breadth: too few stocks influencing the entire market. If you thought that was the only problem the market has, you would be wrong.  In this Newsletter, I am talking about how expensive US stocks are and why one day we might pay the price for being dumb and not doing something about it.

    But is the US market too expensive?  

    Like all good questions, the answer is “it’s complicated”. US stocks have been frothy many times in the past.  We all remember the great tech bubble in 2000 and how that ended.  Fear of past financial trauma biases our understanding of markets. Historically high PE ratios have not all ended in bloodshed.  It’s somewhat a myth that high PE ratios always end in disaster. Without further context, higher PEs are not very predictive in and of themselves, in the short run or in the long run when so many other things can happen.

    We primarily measure how expensive a market is by PE ratios: the Price we pay for each dollar of Earnings.  An easy example of this is when we buy a 10$ stock that makes a 1 dollar per share of earnings a year. The PE ratio is 10, or 10$ divided by 1$ –  sounds pretty simple.  It also means that your theoretical return (earnings yield) is 10%, because if all things remain equal, the stock will keep providing you 1$ a year for that initial investment. PE ratio is not the only factor that determines value; there are many other factors at play such as earnings growth, future expectations, risk, interest rates, and so on. Basically, high or low PE ratios need to be put into economic context to make any sense. 

    An example of this is when after a recession, earnings falls, creating a high PE ratio. To many, this results in high risk, but when the economy rebounds, it sends earnings and stock prices straight up.  So was a high PE risky in this case? No. In this scenario, it was the opposite.  For argument’s sake, we will keep it simple and use PE ratios to compare everything against each other…a relativity game. Although High PE ratios are not predictive, they at least give us an understanding of which markets might be cheaper and safer than others at any point in time.

    Today the PE ratio of the major indexes are below:

    • SP500 (SPY): 22
    • Nasdaq, (QQQ): 29
    • Russell 2000, (VTWO): 11
    • MSCI world, (URTH): 19
    • MSCI europe, (IEUR): 14
    • Japan 12-15 (sources vary)
    • TSX 300 (xic): 12.24
    • Emerging markets, (MSCI, EEM): 11.78

    As you can see the US indexes are the most expensive relative to other countries/indexes. Its also expensive relative to its historical averages of around 18 (if I use median figures for SP500).

    How did we get here?  

    Why is the US more expensive compared to Europe or Japan?  One could say that the US has out-earned the rest of the world and as such a premium on US stocks is justified.  That sounds pretty good, but the reality is that although US stock returns have outperformed over the last 15 years, it’s not the earnings that account for this over-performance.  US earnings have only slightly beaten European earnings.  Most of the stock over-performance has actually come from PE expansion.  Or in other words, US stocks simply got more expensive relative to other indexes.

    Is this a problem for the small investor? 

    Maybe eventually?  You could have said this years ago and totally got out of US stocks and well, that would have hurt.  You have to remember that 60-70% of the worlds capital markets by weight are US-based.  They are a BIG player. You have to have some pretty strong feelings about this to take an anti US stand and get out of US stocks.  Even if you are right and US stocks falter, you will still feel the pain (albeit less) as the rest of the world is highly correlated to US capital markets. You could simply go to cash, or bonds, but that rarely works out in the long run either.

    There is another similar story that played out if you know your economic history.  Japan at one time in the late 80s early 90s, was a relative powerhouse.  Historians refer to this as a perfect example of a market bubble.  Japan’s stocks could do no wrong and got bid up and up to such heights (PE of 60), that it still has not recovered to this day! There are a lot of reasons that this occurred such as loose monetary policy and general exuberance. Could this happen in the US? Difficult to say, but certainly we could expect that lofty valuations relative to other markets could be a cause for concern. Either foreign markets need to catch up, or US markets need to slow down for an extended period while earnings catch up. Worst case is US markets fall quickly back to normal levels.  This is basically a reversion to the mean or in other words, the necessity to get back to normal levels.

    Now that you know what I know, what should we do?  

    I like to adjust the portfolio slowly, after all, this situation has been around for over a decade.  It’s not  prudent to isolate one’s portfolio completely away from US stocks. In addition, the US market is comprised of many sectors, some of which are not expensive.  This is where the small investor can out shine an ETF investor by simply ignoring big expensive companies think Nvidia, Tesla, etc. Historically, being different than the market means being a big winner or a big loser, so you have to be careful. As I said at the beginning, this situation has been around for years, and anyone who was early and shunned US stocks have been a big loser.  If markets made sense it would be so easy to buy cheap under valued stock and sell short expensive stock.  Guess what, it’s not that simple. No one has ever been able to do this and make reliable money.   

    Unless you have a crystal ball, you need to continue to be market-like by holding some stocks from the US.  You can also choose less expensive (lower PE) US stocks.  In addition, foreign stocks in the long run provide similar returns as US stocks, so you can have more foreign exposure with very little performance loss and lessen your risk.

    But there is a problem. Even though foreign stocks return similar returns in the long run, US stocks have been leading for the last few years. So if you start increasing your foreign and Canadian positions and the US continues to out-perform, you will likely lag against US markets. You will theoretically average out when the leader position changes.  To some people, that is hard to do as no one likes to lag for years.  

    Another view point that most professionals do not talk about much is the risk related to your return.  Even if you underperform a little, yet you have a really safe portfolio by avoiding expensive stocks, you actually could have a superior return when risk is accounted for.  In the long run, holding very expensive stock could be disastrous to a portfolio, requiring decades to catch up, if ever. So sometimes being prudent is the better long term approach, even if it costs some performance in the short run.

    Moral of the story:

    Am I selling all my US positions? No.  That would be silly.  But understanding that there are markets that are relatively cheaper than US markets, we can adjust our portfolios to take advantage of this. Returns might lag a little at first but in the long run, there is a high probability of over-performance or at the very least a better return for the amount of risk taken.

    When constructing or adjusting a portfolio, it’s always good to be diversified by sector, by country, and by type of company.  I always like to have a bit of everything including some high flyers as well as some of the most boring of companies. This month, in light of the theme of this newsletter, I sold Honeywell (HP) with a PE of 24 and replaced it with Mitsui and co, (MITSY) with a PE of 8.  Mitsui is a Japanese trader in the industrial sector.  Low PE ratio, well run, recently bought by Warren Buffett. 

    Here is my international portfolio break down:

    • Canadian: 30%
    • Foreign: 26%
    • USA: 44%

    Marc’s Monthly Moves

    • Sell Honeywell (HON).
    • Buy Mitsui and Co, (Mitsy)

    Marc’s Portfolio YTD Performance

    • Portfolio return: 10.5 % (including currency losses)
    • Portfolio return: 11.0% (without currency losses)
    • S&P 500 return: 12.5%
    • RSP ETF S&P equal weight: 1%
    • TSX: 2.0%

    The portfolio has under performed the S&P 500 by 1.5% percentage points. It has over-performed the Canadian market by 9.5%, which is a big vote for international diversification.

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