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  • Has The New Bull Market Just Begun?

    November 2022 Newsletter

    In my October Newsletter, I explained that I had implemented Phase 1 of my Bear Market Strategy. I purchased the worse performing Sector ETF, (VOX) right after a 25% drop in the S&P 500 index. Yes, I must admit it did feel a little counterintuitive to buy when everyone was selling. The end of the world was not that far away if you believed market sentiment. In fact, it’s quite surprising how often the end of the world comes around in the financial world. I was even so bold as to state that the best-case scenario for my strategy would be for the market to fall another 20%, triggering 2 more strategy buys. Click here for the full details strategy details.

    One Month Later…

    Since last month, the market has swung back and surprisingly gained almost 6%. Who saw that coming? Keep in mind it’s early days… not yet time to start counting chickens. Nonetheless, as this is a monthly newsletter, I think it makes sense e to observe the effects of this latest market move on the hobby portfolio and assess how the new strategy is working out.

    My hobby portfolio has gained against the index and is now overperforming by about 5.5% – yeah! Looking a little closer, the new VOX ETF certainly helped by gaining 7%, but with such a small position, it does not explain such a big gain. After some analysis, it appears that 90% of the gain was simply natural over-performance by the portfolio itself. It’s too early for the strategy to have had any significant effect yet. Although disappointing from a strategy perspective, the portfolio is still up big time. Luck seems to be on my side and as I have always said, luck plays a huge role in investing.

    The Relativity Game

    As most of you know, I play a relativity game with the market. If I can beat the market, whether the year ends positively or negatively, I have a winning year. I generally try to beat the market by 1-3% annually. Attempting to beat the market by more than this would mean having to make bigger bets, which would be riskier and may not play out in my favour. I am not smart enough to consistently win big year after year. I also dislike the idea of underperforming for years, just to get that one big year. I would prefer to keep getting base hits one after another. There are times when I do like to swing a little harder – typically when Mr. Market gets a little stupid – and I am quite happy to take advantage of these moments. I never swing too hard just in case my strategy ends up being wrong for some reason… it happens! Never bet the farm on any strategy because Mr. Market will one day wipe you out.

    The year is almost over, and if it ended today, it would be a huge win for the portfolio. In addition to being 5.5% ahead of the market, the portfolio has an exchange rate gain of almost 6%. I do not include currency gains in my stock performance because they have nothing to do with stocks, they are mere currency exchange luck. It’s not much different than if Grandma gave me a bag of money for Xmas. Would I add that to my stock performance? No.

    Can I Still Win if I Lose Money?

    Answer: Absolutely! Despite currently beating the market by 5.5%, my return so far this year is negative. I realize that most people feel bad about having a negative return even if they beat the market, but you need to realize that the game is won over the long run, which is always positive. If you can beat the market by a point or two every year (even in the negative years), it makes a huge difference. This small percentage point can mean a difference of hundreds of thousands of dollars over 20-30 years. What most people don’t realize is that it’s actually easier to outperform the market in down years because everyone loses their mind when the market falls hard. They get emotional and make bad decisions. It’s much easier to find deals on stocks in an environment where people are panic selling.

    What About Crypto?

    Everyone is talking about the FTX exchange bankruptcy. All Cryptocurrency prices have been hit hard by the demise of FTX, the company with the 5th largest exchange platform in the world. It’s a huge confidence blow to the industry. I won’t get into why that happened as there are plenty of people offering that analysis. It’s a pretty fluid situation and the full ramifications have not yet been understood. Many people think of me as anti-Crypto, which is not entirely true. My Economics background allows me to understand that creating alternative money is extremely complicated. All money is not “real” in my opinion; it’s a human construct and although brilliant, it’s subject to human limitations. That being said, I’m of the opinion that Crypto is speculative. Sure you can buy some, but not more than your risk profile allows… maybe 2-5%. In other words, I am not anti-Crypto. I am pro-understanding your risk. Lots of people have spent too much time trying to convince the market that crypto was the best thing since sliced bread. You have to be wary whenever you see huge amounts of promotion in the financial field, especially in areas with little regulation. Good investing is boring, not exciting – that’s almost a rule.

    Is This The End Of Crypto?

    It’s likely not the end of Crypto. I think this latest event is survivable, but the world has certainly changed. Confidence is a cornerstone of the concept of money and confidence in Crypto has been damaged. Crypto could end up in the dog house for a few years, no one knows for sure. Thankfully there are a lot of believers who, no matter the data, will stand by the Crypto ship, even if it sinks. It could become a niche market as it once was years ago and survive in obscurity. Could things turn around? Who knows? It’s really hard to say because…it’s speculative!

    What no one is talking about is a plausible scenario in which no matter how Crypto plays out, there could be a rotation in asset classes. Meaning that if you hold Crypto but feel less secure about it after what has transpired, you and a million other investors may start diversifying into other assets, including other stocks, for safety. This would put more selling pressure on Crypto and upwards pressure on other assets. The Crypto market is relatively small, but it could still cause ripples. The counterargument is that anyone who missed the first Crypto boat may feel that this is a time to get on board, and that could keep prices stable or possibly start moving them back up. Movies and books are already being planned to tell this story, even before it ends.

    Looking Forward

    I have to admit I was pretty lucky when I called for better days ahead last month. Are they here to stay? I have no clue in the short run. My view remains that given enough time the bull run will charge ahead. Is this the beginning? It’s too early to say, but it’s nice to see some positivity. That said, it would be in my best interest for the market to fall another 30% in order to trigger the last 2 buys of my strategy. Either way, things are looking good for the portfolio.

    Marc’s Monthly Moves

    Nada.

    Marc’s Portfolio YTD Performance

    My portfolio page is LIVE! I will continue to update it monthly. It contains a full list of my positions and the performance information that I’ve included below.

    • Portfolio return: -4% (including currency gains)
    • Portfolio return: -9.85% (without currency gains)
    • S&P 500 return: -15.5%
    • TSX: -3.95%

    The portfolio overperformed the S&P 500 by 5.65 percentage points.


    Happy investing.
    M

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  • Financial YouTubers: Friend or Foe?

    The Road to Riches is Very Noisy

    Everyone who invests their own money is on a journey to riches. Well, that is everyone’s intent at least. The reality is that most people’s journey, including my own, is full of volatility, especially at the beginning. We’re all pretty dumb in the beginning and our annual returns are all over the place. This makes sense because financial investing is not taught in school, it’s mostly self-taught. Unfortunately, it also means we can be very susceptible to questionable influences in a very noisy market environment.

    I made a lot of money in the market when I was young and dumb but also lost almost as much. I once murdered $100K during the tech bubble; that was pretty dumb. This type of behaviour is typical for most small investors. Learning from one’s mistakes can eventually break you out of that pattern, as it did for me. Alternatively, you can seek professional help, not the mental health kind, although there is an argument for that as well. Sadly, many small investors stubbornly choose to keep trying without any success, often based on bad advice, becoming part of the bleak long-term statistic of returning 3-4 percent annually (by average). If you are reading this Blog, you are likely much smarter than most and have realized that the road to riches is paved with myths, lies, and not-so-good intentions.

    The Distractions – aka Market Noise

    The investing world has changed significantly since 1987 when I officially opened my first discount investment account. At that time, there was no internet (not as we know it today) and as a result, financial information was difficult to find except in newspapers, or from your broker, which was limited and lagging. Today, everyone has the financials right on their phone in real-time. The playing field is more level than it has ever been but the same technology has also inundated us with unlimited distractions, from TV pundits, all-day news networks, bloggers, Reddit, and the worst, financial vloggers on YouTube.

    You would think that with all the information now available, the small investor would surely be making market-like returns (9%). Unfortunately, this is not the case, mostly due to investors’ inability to drown out the noise. I have learned over the years to be careful about what I read and watch. It’s virtually impossible to not be influenced in some way or another by the noise. So I generally only follow a couple of investment YouTubers that I feel have it mostly right. The rest I avoid, but as I am always looking for new ideas, I sometimes visit these other channels out of curiosity and am often appalled by what I see. Some of it should be illegal.

    Understanding Incentives

    It’s no secret that everyone works on incentives and if you keep that in mind, it’s easy to see what is wrong with the YouTube Financial Gurus. The YouTube platform works on complex algorithms that reward YouTubers for creating content at regular intervals and using titles that match what people are looking for or reacting to. If you have a boring YouTube video title, the algorithm will not reward you with as many viewers. A good YouTuber will recognize this and adjust his or her content. Before you know it, their channel has reached 100k subscribers and as a result, they get a YouTube plaque (reward) and are well on their way to living off the proceeds of advertisers and corporate sponsors. In other words, they are now dependent on the algorithm for their continued success and financial well-being. The problem is that they become a slave to the algorithm, which reinforces the subject matters that generate the most views and reactions from people, typically those based on fear and greed. You just have to search the YouTube financial channels and note how many titles are about “10x your return”, or “a crash is coming”, etc.

    There’s Another Problem

    Another problem is that most of these YouTubers are really young and as a result, inexperienced and often arrogant. The reality is that anyone can start a YouTube channel when the market is going up and show over-performance by simply increasing risk. Those who have been around longer than the last bull market know that real skill is seen when the market is in decline. Without this experience/knowledge, novice investors can murder their money forever. This is what actually happened to most of these YouTubers more recently in the tech downdraft. Suddenly, their real performance is no longer something they talk about on their channel because who wants to follow someone who murders their own money? They have instead started ignoring their losses and carrying on, hoping no one figures out how badly they’re doing. Subscribers have nevertheless lost enthusiasm for investing and left these channels in droves. As a result, the YouTubers’ revenues fell big time.

    Case in Point: I had an online discussion with a Canadian YouTuber that I was following regarding how risky many of his positions were, but he was unwilling to acknowledge my advice. At that point, I realized that it did not matter whether he agreed with me or not, because his content is driven by his incentive to make money by maximizing the YouTube algorithm, not by sticking to sound investing principles. If he is living off this YouTube revenue, he has no choice but to feed the algorithm. In the end, the small investor will almost always find either fear or greed being peddled by these YouTubers. Most of them are charlatans and not your friends.

    To be fair, I am generalizing and admittedly, I have not reviewed all of the channels out there – they are endless. I should also state that I am referring specifically to the financial channels that are stock-related. There are many other types of financial YouTube channels out there.

    Wait a Minute… What are my Incentives?

    Everything creates bias, including this blog. There is no way around it. The noise in the market is everywhere and just being aware of it is not enough. Understanding yourself and how you react to the noise is somewhat valuable. Understanding the incentives of others also goes a long way in determining if they have your best interest in mind. As I said before, I am very picky about what I watch or read and you should be too. Those who tend to get addicted to daily financial news on average trade more often, make more bad choices, and in the end have lower returns. The noise might be loud and inescapable, but you still have some choice in how you consume it.

    If you have read my past newsletters, then you know that I create this content as a retirement hobby. It’s an activity to make myself a better investor. It’s more about me than it is about you (sorry). I share my thoughts in hopes that people might find the content interesting and I may even help them in their investing path. That is all. I do not need the reader in order for me to make a living, I do not need to scare you and I will not make you rich fast. There is also no money in it for me (it actually costs me money to keep a blog), and no fame. So you are pretty safe here. You don’t have to smash a like button, or even subscribe – unless you feel that it’s in your best interest…which it is (wink).

    Marc-Approved YouTube Channels & Resources

    The only two YouTube channels that I watch consistently are Sven Carlin – Value Investing, and Fisher Investments. Sven’s Channel is my favourite. He has solid content and is quite honest about how he struggles with the YouTube algorithm issue. He has actually sold off one of his public portfolios because he felt that he was being influenced by the need to get views from his channel. Ultimately, he sells a research platform to subscribers so unfortunately, the incentive to keep content unbiased is very difficult, but he tries.

    Ken Fisher of Fisher Investments has written several excellent books and is always trying to educate his followers by busting investment myths and highlighting the big picture. He is a somewhat awkward but prolific billionaire who, despite not needing the money, likes to get out there on YouTube to share his knowledge with those willing to listen. My favourite book of his is: “The Only Three Questions that Count”.

    In addition to these YouTube channels, I also enjoy:

    • Paul Merriman: An older dude with a no-nonsense website and podcast. He’s big on simple ETFs and the big picture.
    • Excess Returns: Two very nerdy dudes with a Podcast that focuses on value investing.
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  • The Market is Falling, So Why Am I Buying?

    October 2022 Newsletter

    In my July Newsletter, I set out a strategy to start buying positions in the least loved sector if and when the S&P 500 falls below 25% year to date (YTD). After a couple of near misses, the market finally crossed over this threshold albeit for a short time. True to my word, I purchased a 3% weighted position in the Vanguard Communications Sector ETF (VOX) on October 13, 2022. The price was $79.89.

    A Quick Recap of the Strategy

    The strategy is based on an older similar strategy that I successfully implemented during the pandemic bear market of 2020. Effectively, as the market continues to fall, I buy positions at 3 different levels, one at -25% of the S&P 500 YTD, a second at -35%, and a final buy at -45%. The maximum I purchase is capped at 10% of the portfolio just in case things go wrong. The funding for the purchase is borrowed from the margin of the account. In other words, I am taking a loan from my broker for as much as 10% of the value of the portfolio for these additional positions. I am therefore invested at 110% or leveraged at 10% if all three thresholds are met.

    The premise of the strategy is that bear markets cycle in and out every 4-5 years. The average drawdown of a bear market is about 35%. Bear markets generally feel horrible to the investor as they slowly make their way down, and near the end, they fall even faster as everyone gets scared out of the stock market. When this happens, the market roars back up with the biggest losing sectors leading the way. This story has played out time and time again. Could this time be different? Maybe, it’s a weird and nutty time for sure, but the odds are that it will be similar to past bear markets. The biggest challenge is that there is no way of knowing how far down the market will go, or how long it will take. Timing these things is extremely difficult. It’s for this reason that I have set up the strategy with 3 tranches so that the more the market falls, the more leverage I use, and the more likely some of the positions are bought near the bottom, before the big move up.

    Strategy Risks

    I am not going to lie, using leverage is generally a no-no. It’s very dangerous and you should not do as I do. Promise me you will not! You could get hurt! Leverage can make you money much faster, but it works both ways in that you can lose your money just as fast if you’re wrong. In addition to the leverage cap, I have used an ETF to avoid diversification risk. Alternatively, I could have purchased one stock such as Netflix, and risked having it destroyed by Disney in a subscriber war, losing the entire 10%. With the VOX ETF, I have representation of the entire sector and this statistically cannot be entirely destroyed. At the same time I also unfortunately moderate the potential win as I will only get an average return of the sector, rather than hitting it out of the park with that one big winner.

    What if the market continues falling past all the strategy thresholds, then does nothing for 10 years? Although possible, from a probability perspective this is very unlikely. The market at the deepest drawdown, say 40+ percent, is very emotional. It’s what’s called a capitulation. This occurs when investors become so scared or distraught, they cash in their stocks and go home to lie in a fetal position. At that point, the market is so oversold that with any positive news, everyone clamors like lemmings to get back into the market, causing a big move up. So I’m making a play on probability and human emotion. No one really knows what the market is going to do. If I did, I would bet everything on the strategy, but I do not. So strategies always have to be a measured bet based on the likeliness of being right. If I am wrong, I could see my portfolio suffer a 1-2% underperformance, which I can likely make up in the future.

    As most of you know, I do not like to make big, risky bets. I prefer to beat the market by a little bit over and over – that’s what ultimately wins the game. Swinging really hard to get that big hit means striking out often and possibly losing the game. So strategies need to be relatively conservative.

    What If I Am Right?

    Being right is the whole point of the strategy, now isn’t it. Being right or lucky (because it’s hard to tell the difference sometimes) will bring me much fame and fortune. If all 3 tranches of the strategy get implemented and the market roars back up to the high, then the strategy could pay out almost 4% of the portfolio over performance. This along with any other overperformance from the rest of the portfolio could make for another big year.

    What If I Am Wrong?

    Well, this means that I only get a partial strategy in place, which means only the first tranche gets implemented. If the market roars back, then the portfolio will still benefit, but the overperformance will be limited due to the much smaller bet and smaller return. It’s still a win.

    Looking Forward

    If I am lucky, the market will continue falling and I can implement the last 2 tranches of my strategy. Yes, I do recognize the irony of wanting to see the market fall. The reality is that bear markets tend to create opportunities for people who are willing to buy stock when everyone else is selling. Looking forward, there is an argument for both a continued drop as well as a reversal to the upside. No one really knows for sure. It’s my experience that when the market does get into the bear territory, it usually doesn’t take long to bottom out, whether that is -35% or -55%. So I do expect better days sooner rather than later. Remember, after every bear market in history, there has been a bull market. The better question is how long will it take to get back to previous highs after the bottom? In the last 30 years or so, bear markets have averaged about 14.5 months, but there is a lot of variability and no two bears are the same. Either way, bear markets are normal and I am pretty confident that it will all be good in the long run.

    Marc’s Monthly Moves

    BuySell
    Vanguard Communications ETF (VOX)
    Genmab (GMAB)    		Biogen (BIIB)

    Genmab is a Denmark-based biotechnology company. It specializes in antibody therapeutics to combat cancer as well as other human ailments. I’m replacing Biogen, which shot up 35% this month, with Genmab. GMAB is a much more stable company, it’s international, its earnings growth is good, and it’s more predictable.

    Marc’s Portfolio YTD Performance

    My portfolio page is LIVE! I will continue to update it monthly. It contains a full list of my positions and the performance information that I’ve included below.

    • Portfolio return: -11% (including currency gains)
    • Portfolio return: -19% (without currency gains)
    • S&P 500 return: -21.26%
    • TSX: -11.13%

    The portfolio overperformed the S&P 500 by 2.26 percentage points.

    Happy investing.

    M

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  • Retiring Early: How Much Money Do You Need?

    I struggled with this question ten years ago when I retired at the age of 48. Everyone wants to know: “How much money do I need to retire early? Is it one million? Is it less? More?”. Unfortunately, there is no magic number. Everyone’s situation is different and the answer to this question will depend on a number of factors, which can be very difficult to know in advance.

    In my case, predicting how much money I would need to retire was complicated by two factors: 1) I was retiring over a decade earlier than average; and 2) my wife is 15 years younger than me. Right off the bat, my situation is unique, which changes the traditional math for retirement. If I want to leave some money to my wife when I die, I need my retirement nest egg to last for more than a half-century. To say that everyone is different is an understatement.

    Nailing down the magic number is also complicated by needing to predict retirement needs long before retirement. It can be hard to know exactly how your retirement will play out. What will you be doing in retirement? Traveling? Collecting vintage cars? Predicting your retirement is not easy so the only thing you can do is try to extrapolate what you currently do and spend. Even with all this in mind, I struggled to figure it out. Ultimately, I retired from my job without knowing for sure whether or not I would be living in squalor. As it turns out, my predictions worked and I have enough money to enjoy my retirement. However, it was a little uncertain at first. I spent my first year of retirement mowing people’s lawns for extra cash, just in case. I’m serious.

    Factors to Consider for Early Retirement

    Ok, so there is no magic number, everyone is different, and everyone has to figure out their own number. But how? Here are some of the factors that I considered when I was determining my own magic number.

    Before continuing on, I should be specific about what I mean by early retirement. The average age of retirement in Canada is 64. For the purposes of this article, I consider early retirement to be before the age of 50, a totally subjective number. The idea here is that you are still very far away from any federal/provincial retirement or old age benefits.

    How much do you spend every year? How much do you save?

    Most people have no clue. If you want to maintain the same lifestyle into your retirement, you need to know these. I suggest using a spending app to record your spending for a year or two. I did this and it was incredibly eye-opening.

    What returns are you getting from your investments over the long run?

    This is important to know because mathematically it has a big effect on how much you need to save. If I return 10% annually on my equity portfolio and you return 2% annually on a bond-heavy portfolio, you will need 5 times more savings than me. If I can retire on $1 million, then you might need $5 million! I cannot express how important it is to maximize your returns pre and post-retirement. Realistically you will likely need to be invested in equity if you want to retire early. I am invested 100% in equity and have learned to deal with the extra volatility, but I understand that not everyone can.

    What is your expected drawdown?

    In other words, how much of your nest egg do you plan to take out annually (in percent) once retired? Historically, retirement experts quoted 4% (the rule of 4), which was designed to get you to your deathbed and still have a little money left over, under the worst economic condition scenario. This rule was designed for someone who retires in their 60s and dies in their 80s (give or take). It also assumes a typical return on investment based on a 60% stock, 40% fixed income split. But what if you retire early, like before age 50? What if your super-human genes get you to 100 years old or more? The rule of 4 is just a guide and may not work well for everyone, especially over very long periods.

    Experts have started questioning the rule of 4, first under the super low-interest rates scenario and now under the high inflation scenario. I personally use a 2.5-3% drawdown in order to build in some safety. Under normal conditions, the portfolio will grow and given enough time, create more safety should stock returns fall to zero for extended periods. Again, small changes in drawdown mean big changes in the amount you need to retire. At a 2.5% drawdown rate, you will likely have a perpetual money machine where the portfolio still grows regardless of the drawdown, but it also means that you need more money to retire.

    Planning is Crucial

    If you’ve reached this point in the article, it’s become obvious to you that planning early is crucial to pinpointing your magic number. Just winging it and living “in the now” can work, but you will be at the mercy of randomness. I have known many people who reached their early 60s and shockingly discovered that they are not in a position to retire or that retirement will require lifestyle changes that are unexpected or unappealing to them. For example, having to sell their house or cottage, move to a more affordable city or province, or move into a van and become nomadic. All of these things can be positive (moving into a van is my personal favourite), but no one wants to have to do these things unexpectedly and out of necessity.

    I haven’t addressed considerations such as the Canada Pension Plan or Old Age Security in this article because if you are going to retire early, these sources of income will not be available to you for a decade or more. In my opinion, you will need to be financially independent when you retire early and these income sources become future perks. For those who retire at an average age (i.e. early-mid 60s), you can build these income sources into your “how much do I need to retire” scenarios. It’s worth mentioning that if you plan to live alone, you will need more money. Sharing expenses reduces your spending and therefore lowers your retirement income needs. Sorry, single friends.

    Let’s Play a Game

    So everyone is different, but let’s play a game with scenarios for fun. These scenarios assume an early retirement (by ~ age 50), sharing expenses with a partner, and a 100% equity portfolio. Note: The amounts to retire below are per person.

    John lives in Canada and retired on $250K. John is eccentric. He and his equally eccentric girlfriend Moonshade are willing to live an extremely frugal life. He works part-time here and there as a dog walker to add to the $8K ($667 a month) he receives out of his portfolio each year. John gets around by bicycle – no car for him. He and Moonshade rent a room in a shared house, away from the big city. He doesn’t mind borrowing things when he needs them. He makes some of his own clothes and forages in the woods for mushrooms. John is super happy but this lifestyle isn’t appealing to most people and it doesn’t leave much room for unexpected expenses.

    Mary retired on $500K. Certainly, that should be more than enough to retire comfortably? Well, we’re getting closer for sure. Mary pulls out about $16K tax-free from her account each year (~$1,350 a month). Mary is quite frugal; she does not own a house or live near a big city. She shares a small apartment with her boyfriend Max and together they could likely afford to purchase an inexpensive car. She occasionally works part-time at a job she enjoys to make ends meet. Although Mary makes her retirement work, it’s worth highlighting that her annual income is borderline poverty according to Statistics Canada.

    Ken retired from his acting career with $750K. This sum and the lifestyle it can afford is much closer to what most people would consider “normal”. Ken is able to pull $22.5K (~$1,900 a month) tax-free each year from his account. He lives in a modest home (fully paid off) that he shares with his wife, Barbie. They share a car together and enjoy some normal luxuries, like a gym membership and light travel. His budget is frugal but in no way extreme. Ken doesn’t need to work at all and he can afford to wear nice clothes that are Barbie-approved.

    Mindy retired with $1 Million, and she is able to pull $30K (~$2,500 a month) tax-free each year from her account. Mindy is a millionaire! Let’s not celebrate yet, as being a millionaire isn’t what it used to be. It’s actually very similar to retiring on $750k but everything is just a little easier. Compared with Ken, Mindy owns a better house, is closer to the city, drives a better-used car, and can afford to eat out and travel more often. That said, she is in no way “well off”, she’s basically average.

    So, how much is enough? It depends entirely on the retirement lifestyle you want. If you are accustomed to new cars, live in a house or condo in a larger city, own a cottage, and enjoy traveling, you may need $2M or more to maintain that lifestyle. There is really no limit. A simple formula for estimating the amount needed to retire is:

    What you spend now / your drawdown = the sum needed to retire.

    For example, if you spend 50K annually / divided by .03 = $1.67 Million.

    CONCLUSION

    The above scenarios are based on my experience living in central Canada. It goes without saying that where you live plays an important role in determining your magic number for retirement. Most people will need at least $1 million to retire early and comfortably. How fast you get to a million or more all comes down to how much you save and what kind of returns you average. Market-like returns are essential to retiring early, which means investing in stocks. If you’re not comfortable with 100% equity then you will need to save more money to make up for the relative underperformance of fixed income.

    I would also advise overshooting your goal slightly as a safety measure. Who wants to climb a rope designed to hold their exact weight and no more? On average retired people spend 25% or less than they did when they worked, so that can be a simple margin of safety.

    Note: In Canada, there is the Canadian Dividend tax credit which essentially gives Canadian taxpayers a break on the dividends earned by eligible Canadian corporations. As the scenarios that I presented assume 100% equity, John, Mary, Ken, and Mindy would not likely pay taxes due to this credit.

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  • Why I Hate Energy Stocks… but Still Have Some

    Every so often I review a sector within my portfolio to make sure that the individual positions still make sense. A review of my Energy stocks reminded me how much I despise that sector. Why? Because Energy stocks do not act like normal stocks. They have an additional level of complexity based on the underlying commodity. What I mean is that you can own the most well-run Energy company and still lose money because the underlying commodity is falling in price. So unlike other types of companies, you need to get both of these factors right at the same time.

    Why is it So Difficult to Predict the Future Price of Oil & Gas?

    Putting on my economist hat, it all comes down to supply and demand, which are volatile, always pulling and pushing on the price every day. On the demand side, you have the consumers and industries (the economy) who are addicted to more and more energy, until they change their minds. You also have other influencing factors such as the weather (e.g. cold winters) and long-term population growth.

    On the supply side, you have the Organization of Exporting Countries (OPEC, also known as the evil cartel), which attempts to manage supply (i.e. keep it low) in order to prop up the price in their favour. The 13 Member Countries control about 45% of all world production, which is enough to be very influential in setting the price. The remaining production is at the mercy of geopolitics or in other words, international squabbles. Take Venezuela for example; they decided to nationalize (steal) all foreign oil company assets within their country in 1976, and to a lesser extent in 2007.

    Enough with Economics 101. You witness the effect of supply and demand every day at the gas pump when you fill up one of your 2 to 3 cars. Some of the biggest shifts in price come when the world falls into recession (demand falls). More recently on the geopolitical scene, Russia cut off the supply of oil and gas to Europe as retaliation for Ukraine war sanctions. Do you see the problem with Energy? It’s a nightmare! There is no way to figure out where energy prices are going to go with any certainty. It’s a similar story for other commodity-based stocks such as gold, copper, steel, etc.

    On the investment side, these companies are what are known as cyclicals, which means they are generally tied to the health of the economy. Cyclicals are much more volatile than other types of stocks as they tend to boom, bust, and then start over. You have to be very careful when investing in cyclicals. In contrast, the Consumer Staple sector (e.g. hotdog makers) sells their goods no matter the economic cycle… same with Health Care. People need to eat and brush their teeth, right?

    It’s also worth pointing out that the Energy sector is about more than just oil and gas, further complicating things. Think nuclear, pipelines, exploration, solar, wind, biomass, hydro… it seems never-ending. Even within oil and gas, there are the integrateds, explorers, refiners, drillers, pipelines, and fuel stations, just to name a few. While many have written off fossil fuels as “soon-to-be-dead”, they won’t die that quickly, especially with energy demand increasing each year. Most of the Energy sector is still based on fossil fuels. Only about 11.2 % of world energy production comes from renewables, which sounds promising, but ten years earlier it was 8.7%. Yes, renewables are increasing at a faster rate, but the world won’t change just because you bought a Tesla. That being said, if you listened to the market noise, you’d think that you need to divest oil and gas ASAP so as not to be holding the last barrel of oil. I’ve got news: oil and gas will still be around for decades.

    Is There an Energy Strategy?

    Oil & Gas

    My efforts to game oil and gas have been historically hit and (more often) miss. As mentioned, there is so much randomness at work that it’s difficult to set up strategies that have a high probability of working. Worse yet, if you get it right, a quick swing in oil and gas prices can take back any gains. Any big wins have a big luck component. My only strategy on oil and gas is to buy companies when prices are relatively low, hold an overweight position when no one else wants them, and then wait. I did this (see my earlier post) a little over a year ago when I loaded up on Shell, which has since produced a 50% return. Many years ago when oil was $120+ USD, I did not hold any positions. That’s about it as far as strategies go. It’s still a strategy, however, it’s of the dumbest, caveman type.

    Nuclear

    My other strategy for Energy was to increase my diversification by investing in Cameco, a Canadian Uranium producer. With the world getting more serious about climate change, and where clean energy will be the answer, nuclear energy is a requirement that no one recognizes or wants. Since the 2011 Fukushima nuclear disaster in Japan, no one globally wants to invest in the industry. Many countries shut down existing plants or at least stopped building new ones. The industry was a dog for years, prices crumbled, and it was dead money.

    However, with Russia using its natural gas as a weapon against Europe, many countries are now rethinking nuclear. Even Japan has changed its policies and has plans to reopen shuttered nuclear plants to lower its reliance on foreign energy. The story makes more and more sense because new reactors are safer than previous versions, cost less to build, and are basically zero-emission. Any serious attempt at reaching carbon targets will likely require nuclear. Countries like France have relied on nuclear for decades without any serious issues. It of course has its’ flaws but within the last year or so, the Cameco Position has gone up 62%.

    Other alternatives in Energy include solar, wind, geothermal, etc. I like these in general and would love to own some at some point, but every time I try to diversify into one of these, I find that they are too expensive and therefore not a good risk-reward option. One day, I will own some.

    Should You Invest in Energy Now?

    After these run-ups, I am more inclined to sell and bring my weightings down to full weight (5%), or maybe even underweight a little, particularly on the oil and gas side. For now, I will keep the weighting and play out the strategy. I still believe that over the very long run, barring another disaster, nuclear has a positive runway for years to come. I believe oil and gas may have a decent run back up with winter coming and with the uncertainties with the Russia-Ukraine war. But as always, things can change quickly (e.g. Ukraine invades Russia) and there’s little ability to foresee the future.

    Surprisingly Warren Buffett has been buying up Occidental Petroleum by the truckload. Similar to me, he is staying within the safety of big powerful companies in this weird investing climate, so that is a vote of confidence. There are few certainties when it comes to Energy, nevertheless, everyone should have some exposure.

    FYI: I own Royal Dutch Shell and Cameco.

    How Much Energy Should You Own?

    Answer: not a lot. Surprisingly, energy has become less of a player in the world over the years, and it’s small compared to other sectors. To put it into perspective, Apple is worth more than all the S&P 500 Energy sector combined. As of this writing, even with its recent run-up, Energy is still worth less than 5% of the economy. Compare this to the 38% represented by the combined Technology and Communication sectors. Any big gain in such a small sector gets out-competed by the bigger sectors.

    My big bet in Energy earlier this year had me at about almost double the S&P 500 weighting or about 5% of the portfolio at the time. Anything more would become too speculative in case I was wrong. So the more specific answer to the above question for any new investors is a little less than 5% portfolio weighting to reflect today’s index weighting. My current weighting is about 6%.

    Looking Forward

    It’s been a difficult month as the market continues to figure out its value. It’s up big then down big, with a very negative sentiment at the moment. Inflation persists and is likely to continue, which means more rate hikes and a higher probability of a big recession. A recession means lowers earnings, which often translates to falling stock values, but not always. In the short run (one year or so) volatility will continue, so it’s best to stay heavily diversified for now. Volatility works both ways, so the market could go up, which no one is expecting.

    Marc’s Monthly Moves

    • Nada.

    Marc’s Portfolio YTD Performance

    My portfolio page is now LIVE! It will be updated monthly and contains my full list of positions as well as the performance information that I’ve included below.

    • Portfolio return: -14.6% (including currency gains)
    • Portfolio return: -22.0% (without currency gains)
    • S&P 500 return: -22.51%
    • TSX: -12.92%

    The portfolio overperformed the S&P 500 by 0.5 percentage points.

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  • Retire in Your 20s! Is it Possible?

    So there’s an early retirement movement that has been around for a while. It’s called Financial Independence Retire Early (FIRE). The idea behind the movement is to save half or more of your salary, by living a super frugal life and investing until the income generated by your investments equals your annual spending costs. Mathematically, this idea has legs.

    The movement is quick to showcase people in their late 20s or early 30s that have retired and are living the good life. Who wouldn’t want that? Well, some people actually like working, I guess we could start with them. Typically, however, most followers of FIRE aim for retirement in their 40s. I am always skeptical of such sensational claims but maybe these people figured out something that I missed. How could retiring before 30 even be possible? Most people don’t even graduate from university until they’re in their mid-20s.

    Is FIRE Possible?

    Luckily, social media provided some answers as to how these super retirement achievers made it to the top of the FIRE food chain. I did not have to dig far to discover that these showcased individuals almost always had a few uncommon advantages. In most cases, they managed to land lucrative jobs right out of university, paying well over six figures. For those saving $100k each year, it wouldn’t take long to build quite a FIRE nest egg. In other examples, the individuals had normal well-paying jobs but led a life of extreme frugality, living on $10k a year for example. Their extreme frugality meant sharing an apartment, no vehicle, no eating out, and just one or two luxuries like a gym membership (things most people consider essential or normal). So yes, FIRE is possible and successful examples do exist, however, these scenarios are extreme and not realistic for most people.

    How Frugal is Too Frugal?

    In my experience, it’s very difficult to sustain such a frugal lifestyle, particularly if you’re not a frugal person, to begin with. I’m a pretty frugal guy (maybe too frugal in the opinion of some), and I never came close to saving 50% of my income annually over long periods. Life gets in the way. Mortgages, house repairs, break-ups, pets, investing mistakes, wanting to eat three meals a day… these expenses add up! I would guesstimate that I averaged 25% savings annually, with some early years at 0% and my last year of work at 70%. It’s the never-ending compromise of living now versus living later. Each person has to strike the right balance for them and it’s a very personal thing. For most people, the extreme version of FIRE is not acceptable. It’s like that super strict diet that only a few weirdos can stick with. Ok, that is harsh. Maybe I am jealous of such discipline. People who succeed at this tend to be obsessive about things, overly disciplined, definitely not like me, and likely not like you.

    Should You Follow FIRE?

    Ok, so maybe landing a six-figure job is unrealistic for most, but everyone could become extremely frugal, right? Well, sort of. Everyone is different, and lifestyle is measured from a relative perspective. Generally, people think that the level of frugality just below their level is ok and acceptable but they look upon two levels below as being extreme and well, weird. We all know those people at work who would never go out for a beer and pizza because it was too expensive or an unnecessary luxury. They were the weird ones (and most likely my friends).

    I am not the best person to judge, but I think that everyone has their own path and what is most important is how happy you are. If you are happy doing the FIRE approach, more power to you. If you are happy spending every cent you make and know that you will work till 70 then you are good too! In my experience jumping several levels to extreme frugality is difficult. Now then, jumping one level is likely good for you and could be life-changing if you feel like you are never getting ahead.

    FIRE in Moderation

    Looking back 30 years or so, you could say I did follow FIRE even before the term was ever coined. These are essentially good financial habits that everyone should use if they plan on an earlier retirement path. it’s basically: save and invest your hard-earned money… that is all it is, simple. It’s the ‘extreme’ part that is the new concept. I retired at 48, which makes me a FIRE underachiever for sure. I retired younger than most, but long after the FIRE overachievers. I decided in my 20s to save more of my money than most, but I didn’t want to forego traveling and other hobbies. I visited Europe, Australia, and Central America. I also owned a house, cars, boats, etc. The biggest difference was I was always finding ways to do it on the cheap. Buying ten-year-old cars, backpacking, building my first kitchen out of scrap wood, etc.

    The moral of the story is that although the FIRE movement sounds bat sh$t crazy to some, and is likely not for everyone, conceptually there are aspects of it that are very valuable that can be borrowed and applied to your retirement strategy. I am a big fan of borrowing other people’s ideas, it’s totally legal. In the end, it always comes down to whether you are better off (measured by happiness, not $).

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  • Money with Marc: From Newsletter to Blog

    Big changes are coming to the Monthly Newsletter! My girlfriend Nat, who has skills related to publishing blogs, website design, and other things too, has finally convinced me to get real… using the (gasp) interweb. Well as long as she does the work, why not? So here it is!

    The blog will provide a better platform to send out and share the Monthly Newsletter. The flexibility of this new format will also provide me an opportunity to share other related content like saving money, early retirement, and lifestyle choices that play a critical part in investing. I’m also hoping to provide an always-available and visually appealing portfolio page for all to see (coming soon).

    What will these changes mean for the 5 people who actually read these monthly emails? Nothing really, except that your experience will be generally better and I promise, much more colourful! I will continue to send the Monthly Newsletter by email for a few months until I’m sure that everyone has managed to find the site. The Newsletter and Blog will remain free as I have no aspirations of monetizing them at this time 😉

    Why the Change?

    So why the change? Am I looking for a broader audience? Maybe… having a broader audience provides me with more opportunities to interact with other investor nerds. I am always looking for new ideas. I have historically tried to keep the Newsletter quiet, only offering access if I was asked. If you recall I write the newsletter for two purposes:

    • To structure my own thoughts, build strategies, learn and be accountable for my mistakes and failures, and in doing so achieve my goal, which is to beat the market by 1 – 3% in the long run.
    • To teach others about investing, share my ideas, strategies, and principles, and hopefully learn from them as well.

    Over the last decade, I have managed to achieve market-like returns, some years ahead a bit, some years behind a bit, but overall ahead. To most people, this performance is not inspiring. However, anyone in the business would tell you how difficult it is to achieve this. 90% of fund managers cannot beat the market. These are often Ivy League-educated people. It’s worse for the small investor… almost 95% underperform the market in the long run. And these figures also don’t consider how luck plays a role in returns. Of the small number of winners, how many achieved this by luck versus skill? The answer could be scary. It’s also well known that top-winning managers never stay on top consistently (think Ark funds), so there you go.

    So how do I beat the market over long periods, and most people can’t? Am I special? Not really. It could be luck, but my strategy is simple:

    • Don’t be greedy or take on huge risks attempting to beat the market by a lot.
    • Make moves that mimic the market most of the time.
    • Don’t make dumb, emotional decisions.
    • Avoid being influenced by the herd.
    • Seek out an edge to gain some overperformance.

    A few disciplined rules are all it takes to get market-like returns. That is all it is… kind of boring, but that’s how I do it.

    How to Subscribe to the Blog

    • Click the subscribe button (it’s bright pink… you can’t miss it!)
    • Enter your email address
    • Click confirm in the email that you receive from WordPress
    • Stay tuned for the next post!

    Back to My Regular Programming

    We are technically in a recession, so why is the market going up? In the last 30 days, the S&P 500 was well on its way to a 5%+ return until Friday, when things got nasty again. The market cannot figure out if the economy is in good shape or bad shape, or if it will be in bad shape shortly. The Conference Board’s Leading Economic Indicator (LEI) has gone negative and GDP figures have been negative 2 quarters in a row, which puts us in an official recession.

    However as I have said before, things are not normal and there are a number of factors that counter the recession argument. Notably, inflation has dropped due to a fall in energy. Employment data is strong, half a million jobs were added to the US economy in July alone. At the same time, higher rates seem to be the theme lately, the brakes are on. Does this feel like an economic contraction? Depends on the day, but not really, not yet.

    So where is the market headed? Will it continue to charge upwards? It’s hard to say. In the last 30 days, the Energy sector continues to be the big winner, ahead almost 12%, Information Technology around the middle at 2.5%, and Health Care last at -2.6%. The market is still nutty and there are arguments that the market could still be heading down at any moment.

    Marc’s Monthly Moves

    BuySell
    Archer Midland Daniels (ADM)
    Topicus (TOI.V), more
    Shopify (SHOP), more    		Mondelez (MDLZ)

    I sold Mondelez (MDLZ) and bought Archer Midland Daniels (AMD) as a replacement. Note what I did there… both are from the Consumer Staples Sector. AMD is a big conglomerate with hundreds of different products related to nutrition for people and animals. It’s a much stronger business than MDLZ as measured through the usual financial metrics. It’s also a favourite of Sven Carlin, a very competent YouTuber I follow.

    I had a small position in Topicus, but purchased more and now have a full position. It suffered with the rest of the techs in the last downdraft. One of you provided me with some analysis and as much as I originally thought of this position as speculative, I now understand it much better. I think their growth model is actually their superpower and I am more comfortable with it risk-wise.

    Prior to the tech meltdown, I had mostly sold-off Shopify but now I am building a position again at these low prices. Could it fall further? Absolutely. Most things I buy tend to continue down as they are generally out of favour, but patience often pays off big in the long run.

    Marc’s Portfolio YTD Performance

    • Portfolio return -10.1% (Including currency gains)
    • Portfolio return -13.2% (without currency gains)
    • S&P 500 return -14.9%
    • TSX -6.4%

    The portfolio overperformed the S&P 500 by 1.7 percentage points.

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  • The Risk Conspiracy

    Originally published July 25, 2022

    Is your portfolio too risky? What is ‘risk’? How do you measure it? These are all good questions and I have been pondering them since the beginning of the pandemic. In my opinion, most professionals do not understand what true risk is. They almost always talk about the volatility of the market. Without getting into statistical standard deviation, it’s how much the market moves up or down in a given time period, for example, a week, a month, or sometimes a year. Is this what we should really be worried about?

    The Real Risk

    To me, the real risk is anything that would stop me from achieving my financial goals. Most people want to achieve a certain standard of living and would like to retire comfortably within a certain time frame. So the real risks that affect this lovely outcome are things like not investing enough, not investing early enough, and not getting good returns. It’s definitely not the volatility of the market as most professionals would have you believe.

    On the investing side, which is what this newsletter is all about, the real risk is not getting the returns that you need to achieve your goals. As I have said many times, small investors are notorious for murdering money through bad emotional decision-making. Their average long-term return is somewhere between 3-4%, which is a recipe for having to eat cat food in your old age. Or worse than cat food, having no choice but to continue working past retirement age. Now, some people like working, and that is awesome… good for you… unfortunately, it’s not me.

    So there you have it. One of the most significant risks that the small investor is exposed to, is themselves. If the small investor cannot achieve market-like returns (~9%) in the long run, then they will likely have more difficulty achieving their financial goals within their expected timeframe. So what are the bad habits of most small investors? Here are the ones I see all the time.

    Top 8 Bad Investor Habits

    1. Diversification Risk: Most investors wing it. They read something about the latest stock fad on the Internet and then buy a bunch of risky Zing Bang inc. There is no plan generally, so sector weightings are all over the place. There are so many ways to mess this up, for example, too many stocks, not enough stocks, missing sectors, too much weight in a sector, no or little international diversification. This unfortunately represents most investors! Does it include you?
    2. Emotional Trading Risk: Buying what is hot at high prices, then being scared out of the position when prices fall. I’ve seen lots of this recently.
    3. Asset Allocation Risk: This is controversial, but most people still believe that holding fixed income in a portfolio is safer and better than 100% stocks only. This is true in very few instances in the long run. In the very short run, it lowers a portfolio’s volatility and this is what financial advisors base their approach on. The reality is that people invest over decades so they should not care about volatility in the short run, especially if it’s going to cost them big time in the future. Would you pay $250,000, $500,000$, or more so that the portfolio squiggles are not as squiggly? That is basically what you are doing. The difference in end value can be astronomical. Fixed income generally underperforms and is only handy when you might be thinking of buying a yacht in the next year or two as it’s a cash-like substance.
    4. Trading Too Often Risk: I hate to admit it, but investing is supposed to be boring. The more active you are, the more likely you will underperform. I only make a handful of trades each year. For many months I do nothing. The high trading pattern is often linked to overconfidence and other behavior problems… talk to your vet.
    5. Missing the Big Picture Risk: So Mr. Market has sent a few of your positions to the moon and now they make up a big proportion of your wealth. You feel smart, but those positions are overpriced and you need to realize that you must rebalance the portfolio. Mr. Market can quickly take it all back.
    6. Large Speculative Positions Risk: What if most of your wealth is tied up in Buttcoin, the new crypto? You may love it and you are totally enthused by it, butt what if you are wrong and it loses 90% of its value overnight? Speculative stocks should never be more than 1-5% of your portfolio depending on your risk tolerance. I have struck out on one speculative position, but the effect overall was not terminal due to the small size of the position.
    7. Historically Weak Asset Class Risk: Gold spends most of its time losing to the market until it has a short but strong runup. Most people buy gold when it’s running up (buy high), then after it falls or does nothing for years, they get bored and sell (sell low). See the problem? I actually did this once… me bad.
    8. Not Measuring Performance: Every year I stress to people that they need to measure their performance against a benchmark. I use the S&P500, but you could use the TSX or a combination of appropriate indexes. This is the only way to know if you are achieving market-like returns and better yet if you are actually good at investing. Most people would rather not know because it causes emotional pain. Ironically, even though most small investors chronically underperform by huge amounts, they overwhelmingly tend to be repulsed by paying a Wealth Manager or the management fees of a market ETF even though their returns would be much higher. Humans are so complex.

    I could go on. These are just a few examples of bad investor habits/mistakes that small investors make. True risk, as I mentioned is more about the things that negatively affect your financial goals. It should not be about guarding against volatility. The villain in investing is ourselves, so it should be about keeping your emotional brain in check. Market squiggles are normal and in the long run, they are (for the most part) not entirely relevant. They are part of the market dynamics and they help provide the equity return premium. So in a way, it’s a good thing when managed correctly.

    A Final Word on the Market

    Unfortunately, the market has gone up and the likeliness of it falling to -25% has decreased. If you recall, I have a great bear strategy that gets triggered once the market achieves this loss. I will have to make do with a normal, rising portfolio for now. Yes, it’s odd that I would prefer it to drop more. It’s my experience that it’s a lot easier to outperform when people are irrational and fearful. The market can change quickly so there is still a chance for a downturn. The world ends every 2-5 years so there will be more opportunities later if not now.

    Happy investing.

    Marc’s Monthly Moves

    • Nada.

    Marc’s Portfolio YTD Performance

    • Portfolio return -12.75% (Including currency gains)
    • Portfolio return -14.5% (without currency gains)
    • S&P 500 return -16.68%
    • TSX -10.55%

    The portfolio overperformed the S&P 500 by 2.18%.

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  • Almost Time to Go Bear Hunting

    Originally published July 3, 2022

    The American market has finally achieved a bear market status (a fall of 20% or more within the year)… then it climbed back up, then it fell again. So are we in a bear market? Sort of. You have to remember that 20% is not a magic number, it’s simply a human construct to provide a label to the situation and does not have to mean anything other than “it is down a lot”. Relative to other bear markets with 20+ % drops, this one is moving fast. A normal bear market meanders for many months to get to this level. When and at what level will it reverse back to a bull market? No one knows, but the bounce up is initially very quick, forming a ‘V’ pattern on the charts. Almost every bear has them, so it’s a matter of depth and time.

    As I have said before, it’s a nutty time for the market with inflation always present and running at levels unseen in decades. The governments have been increasing rates to slow down the economy. They have also been lowering their balance sheet (read lowering the supply of money). The problem is that the fed rarely gets this right because there are so many complicated moving parts. They often push the economy into a recession (which mentioned before is hard to measure) or slowly land the economy to a 2% inflation environment. No one really knows how it’s going to play out for sure. Either way, lots of serious stuff happening here, much of it pointing to higher pressure on stock prices generally.

    Some of you recall that in 2020, during that weird pandemic bear market, I overperformed by about 9 points. The strategy was simply to margin the account by a max of 10% as the market fell. In other words, take a loan from my broker to buy more stock and be overinvested. Basically picking up perfectly good stock from those who were fear-selling. For those of you who still work, the strategy would be to increase your monthly buying as much as possible, and perhaps not have to deal with leveraging your accounts as this can be dangerous if you overdo it.

    Lessons from 2020

    So what am I going to do this time? Was there something to be learned from the last time? Good question! Yes, there was. In 2020, I was too quick to get into the carnage. I had set up 3 tranches of buying levels based on the SP500 drawdowns of -15%, -25%, and -40%. The first tranche was simply not worth it. After buying stocks at those levels, they simply did not return enough for the risk, especially after the market drawdown fell to about -34%. The second tranche did the heavy lifting and we never got to a third tranche. So what should the tranches be this time? There is no right answer as we cannot predict the future. We statistically have a general idea that the ‘V’ pattern will play out. We will have to make assumptions on how low it will go and how much time it will take. The deeper the fall the more pronounced the ‘V’ gets.

    What else do we know? Generally, anything that has been severely beaten down almost always bounces back the most, like a spring. This is the basis for the strategy. Not all will bounce back, so we have to be careful.

    The Latest Strategy

    The strategy is three tranches of buying at -25%, -35%, and -45% year-to-date (YTD) results of the SP500. Let’s hope we do not see a 45% drawdown, but it’s nevertheless possible.

    Purchases will be based on high-quality communication and consumer discretionary sectors as they are the two biggest losers YTD. I will also consider individual stocks from other sectors that Mr. Market chewed up for no particular reason.

    • Purchasing existing positions or new positions are both acceptable.
    • Selling some existing positions that have done well may also be used to rebalance the portfolio.
    • I may use call options in the later tranches, but definitely not at the first tranche. These can be individual stocks or also index positions.

    The strategy will not consider Bitcoin even though it has fallen almost 75% from its high and 56% YTD. The money destruction of Bitcoin has been dramatic… I have warned about this possibility. I don’t want to sound like a broken record, but Bitcoin is speculative, so no more than 2-5% of a portfolio. Unfortunately, an individual I know had most of his wealth tied up in Bitcoin. He was a very happy camper, having won the game of life, a great long-shot bet that paid off. Now, with 3/4 of that gone, it’s another life-changing story. Don’t get me wrong, things can turn around, but is this really investing? The moral of the story… stay diversified. Heavy portfolio concentrations are for people who can afford to lose it all and not have to eat Kraft Dinner for the rest of their life (although I do like kraft dinner).

    Another plug for market ETFs

    Yes, they are down, because the market is down. However, unlike most small investors, those with ETFs did not get their butts handed to them due to holding too many tech stocks. If you have ETFs, you also likely have some foreign and Canadian ETFs, meaning that you have done better than the big US market. You are likely ahead again. Note to self, if I ever get bored of investing, or start chronically underperforming, I will certainly go the market ETF route.

    So there you go, that is the revised strategy. Now we just have to wait for the market to fall into the trap. As for individual stocks to add to, I am looking at Amazon, and Shopify and will likely add Warner Brothers Discovery (WBD) as a new position. I will keep my eyes open for any rotation within sectors or asset classes as well.

    Happy investing.

    Marc’s Monthly Moves

    • Nada.

    Marc’s Portfolio YTD Performance

    • Portfolio return -14.5% (Including currency gains)
    • Portfolio return -16.5% (without currency gains)
    • S&P 500 return -19.75%
    • TSX -11.13%

    The portfolio overperformed the S&P 500 by 3.25%.

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  • Nowhere to Hide

    Originally published May 22, 2022

    Is the market crashing? Should we sell? Is it the beginning of the end for all asset classes? The internet is bombarding everyone with this kind of noise and scaring investors into selling. It’s the internet and it’s noise, would you really expect a reasonable message? Like, don’t worry it’s normal? Never.

    The Market is Down, What Should I Do?

    Whenever there is a bigger move down I inevitably get a couple of people asking me “What should I do?”. As always, my answer is usually “nothing”. If you have money in the market, it’s because it’s a long-run investment (i.e. 5 years or more). Your average market-like return is based on good years and bad years so essentially you need to ride out the bad years along with the good years to achieve this goal. Market crashes, bear markets, bull markets, and high volatility are all normal events over time.

    Maybe this time it’s different? Scarier? Usually not, but even if it is, the world does not end. The market has dealt with all kinds of scary things in the past and survived… World Wars 1 and 2, and now, 2 pandemics. Yes, there are a lot of weird things happening in the market as I have previously written about. Inflation, yield curves, earnings, interest rates, jobs, government stimulus, etc. Every week the market chews on one of these like a dog shredding its favourite toy.

    There are also positive things that although boring, are quite powerful forces trying to push the market up. It’s a tug of war basically and sometimes the negative side takes the lead. Should you sell out of the market? Now you’re telling me that you can time the market based on how you feel. That rarely works out well for the small investor.

    Do I know where the market is going in the short run? Nope, no one does. In the long run, I am pretty confident it will be up and that is all that matters.

    A Discussion on Strategy

    At the beginning of the year, I usually set an annual stock strategy which I tweak as necessary during the year. This year I called for overperformance of energy and financials, as well as underperformance of technology. I also underweighted USA vs world stocks. As much as that sounds like a radical set of moves, I try to always be measured in case I am wrong. So it’s not as if I sold off all my technology and bought oil stocks. I simply lowered my tech weighting a few points and increased energy and financial weightings a few points each.

    If you recall, I normally want to beat the market but just by a few points on a regular basis. So I try not to deviate too far away from my benchmark in case I am wrong. So how did I do? I got the tech prediction dead on and energy dead on, financials are not quite there yet, and world markets have outperformed the USA economy by a few points. Overall pretty good. However, it’s a strange market that many pundits have called a “nowhere to hide market”. Even though I am getting most of the big picture right, I am only 3.5 points ahead of a moderately down market. My expectations were much higher.

    To be fair, the ‘nowhere to hide’ market has devastated many small investors, as most have been building up some dodgy (low or zero earnings) but fashionable tech stocks that have for the most part been hammered. Even some decent tech names have really fallen. On a relative basis, peer-to-peer, I am doing well. Nevertheless, my approach has always been to measure against a benchmark and I will continue to make that comparison.

    S&P 500 YTD Returns

    Below find the sp500 sector returns year to date.

    • Energy +45.8%
    • Utilities -.5%
    • Materials -9%
    • Consumer staples -9.2%
    • Health care. -9.2%
    • Industrials. -14.5%
    • Financials. -15.8%
    • Real estate. -19.4%
    • Technology -25,3%
    • Communication -27.4%
    • Consumer discretionary -30.7%

    S&P500 -18.14%

    Only energy is positive for the year and big. It’s a relatively small sector so even getting this one right has not made up for all the other negative players (nowhere to hide).

    Looking Forward

    I still think that there is a potential for a market rebound by year-end but I do see a continued reevaluation of stock prices as interest rates continue to rise. My earlier prediction of high volatility has played out and will likely continue for quite a while. In this environment, I think the small investor should keep an eye out for quality companies that get oversold as potential buy opportunities. Facebook which I just picked up might fit that approach at $180. Remember, buy low, sell high.

    Happy investing.

    Marc’s Monthly Moves

    BuySell
    Facebook (FB)Vanguard FTSE ETF (VSS), some

    Marc’s Portfolio YTD Performance

    • Portfolio return -13% (Including currency gains)
    • Portfolio return -14.6% (without currency gains)
    • S&P500 return -18.14%
    • TSX -4.83%

    The portfolio overperformed the S&P500 by 3.5%.

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