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  • The Yield Curve Inverted and a Recession is About to Crash the Stock Market!

    Originally published April 16, 2022

    Almost every day some YouTuber, Analyst, or Media Talking Head yells out a warning that all of a sudden this issue or that issue is about to crash the stock market. The issue could be the inverted yield curve, inflation, government spending, housing prices, and maybe even avocado pricing. These statements are scary for sure, but in the end, they are all mostly noise and already priced in the market. Or are they?

    What will send the market down big time? Well, it’s usually something no one sees coming (pandemic) or a recession, but not always. Sometimes it’s a change in expectation that affects the broader supply and demand of stocks. Lots of things can send the market up and down; a continuous battle rages on day after day where normally not one but many complicated forces end up pushing prices up or pulling them down. Most often it’s difficult to say why the market went up or down on any given day or week unless it’s an obvious big overwhelming force.

    What About the Yield Curve

    The yield curve is supposed to be a predictor of recessions. Historically it has been extremely accurate but the context is important. A quick primer on the yield curve! What the hell is it? In simple terms, it’s merely a line on a graph outlining interest rates on government bonds starting at the 3-month, then 6-month, 1-year all the way to 10 years. Normally the rate you get on a 3-month bond is lower than on a 10-year bond. If you graph this out, you get an upward-sloping curve. This is considered normal as you would expect a higher return for locking in your money for longer.

    Recently this curve inverted meaning you get a better return for shorter-duration bonds than on the longer 10-year bond. Weird right? Every recession in modern times has had an inverted yield curve and the internet is buzzing about this because it just happened. But to be fair, there have been false positives and there are no standards associated with the quality of the yield curve inversion. It merely inverted a little, sort of… but is that enough? Secondly, there are only a few economies in the world with inverted yield curves. So it’s really not a strong argument for a worldwide recession. It normally needs to be stronger across most economies.

    The yield curve is not the only recession indicator in town either. There are two other recession indicators that have also been really good at predicting recessions:

    1. The Conference Board’s Leading Economic Index (LEI), which uses the yield curve and a host of other inputs to measure the future. At this time it is strongly on the positive side meaning no recession.
    2. Sahm rule, which uses unemployment data to measure the likeliness of a recession. It’s quite accurate for USA data but more inconclusive in other economies. It also is not indicating a recession.

    So basically there are no credible economic data points at this time that are forecasting a recession. In addition, a recession in economic terms is technically two back-to-back quarters of negative GDP growth where the data has a huge time lag. You could be in a recession and not even know it. In many recessions in the past, surveys indicated that most people thought the economy was actually fine. So unless they are really bad, they are most often not even noticeable.

    Now the weird part: even if the economy was in a recession, it does not mean the stock market will fall… usually it does, but not always. It’s because these are not the same thing. The stock market is forward-looking while recession data is backward looking.

    So Is There a Looming Recession?

    So any fear-mongering in the media about recessions today is without merit and in a way is bullish for the stock market. Recessions from time to time are normal as are stock market crashes. It all comes down to how the small investor reacts to these normal events that separate the good from the bad investor. If you get scared out of the market after it crashes you miss out on the run back up. If you are too early and there is no crash, you may wait years for one and forgo good returns. As always there is no way to time the market. It’s time in the market not timing the market that works.

    Looking Forward

    I will not lie, it’s still weird out there. I do worry about that unknown issue that might catch us by surprise. But what is it? Run away interest rates? Run away debt? Nuclear war? So many to choose from, yet no obvious menace that is not already known to some extent. I am quite happy to stay 100% in quality equity over diversified positions. It continues to provide some outperformance, for now.

    Happy investing.

    Marc’s Monthly Moves

    • Nada.

    Marc’s Portfolio YTD Performance

    • Portfolio return -4.7% (Including currency losses)
    • Portfolio return -4.5% (without currency losses)
    • SP 500 return -7.85%
    • TSX return +3%

    The portfolio overperformed the S&P 500 by 3.35%.

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  • War, What is it Good For?

    Originally published March 12, 2022

    When huge shocks like a war hit world markets, some companies become winners and others become losers. In a sense, every stock goes through a repricing process as new information enters the market. As the shock of war ripples through the system, military defense companies, and affected commodities like oil producers, fertilizer producers, and gold can quickly become winners while sanctioned Russian companies like Gazprom and Lukoil can similarly become big losers. In addition, any foreign company having joint ventures with Russian companies (there are lots of them), will also suffer. Entire sectors can rotate into and out of favour quickly during the conflict, but historically the market as a whole washes out over time, and market returns are generally normal, albeit with great volatility. Case in point, most of the World War 2 period had positive returns.

    At the portfolio level, it’s a different story. If you have a five-stock portfolio and they are all European banks with business in Russia, you are in big trouble. You are in less trouble if you own only a couple of these affected companies among a 20-position portfolio. Maybe you are lucky and not one of your positions has ever even met a Russian. Luck as most of you know plays an important part in investing.

    Impact on My Portfolio

    In my case, my European banks got hurt as they do deal with Russian companies. My large energy positions which should have provided a big 8% or more boost ended up holding the short end of the stick because Shell has a Russian investment that it has decided to write off, and the stock is down 8%… bad luck. While at the same time my Cameco (uranium) position went up 22% (good luck). There are winners and losers in my portfolio and overall the portfolio is still ahead of the market but only by 3.5%. Pre-war, I was almost 5% ahead. Again, luck plays a big role in how each portfolio gets affected.

    What Should the Small Investor Do?

    So what should the small investor do after the shock? Not much… seriously. It’s caveman human nature that programs us to run away from scary events. Emotion is always our enemy. Doing nothing, as unintuitive as it may be, is usually the right approach. The damage is done, no sense in jumping off the cliff with the rest of the lemmings (sellers).

    But what if the war escalates or becomes even scarier? Could there be unforeseen repercussions affecting energy? The banking system? Supply chain system? Crypto? Spaghetti? Maybe, but no one knows for sure. The world is much more integrated than it ever used to be so there is always a risk, but how is that different than any other day? Starting a war while most countries are still mopping up Covid and experiencing the highest debts to GDP in history is likely not coincidental.

    The better question: is the war in Ukraine investable? It sounds selfish to ask this question but at the same time, you need to understand that some arrogant dictator is purposely wreaking havoc in the world and in the markets, and he is personally affecting your portfolio. Is it wrong to sell off your Russian positions? Or buy them? It’s everyone’s responsibility to manage their portfolios in the best way they can to achieve their long-term goals, even during depressing events. So, back to the question, is it investable? Not easily. Markets move fast with shocks. No one could have predicted a madman’s plans with any certainty. It’s generally not investable. This is where diversification before any shock was your only and best strategy.

    So, What Now?

    As much as the shock is not investable, there are certain tactile moves that one can make. Effectively, you could buy beaten-down Russian positions and assume in a year or more that everything will go back to normal… if that’s possible. I would advise against this as there is a risk that these companies get permanently delisted and you could see huge destruction of capital. This approach is definitely speculative at best and not what this newsletter is about.

    What if you hold a Russian position? You likely only own 1 at best if you diversified and it likely represents under 5% if you follow the advice in this newsletter, so the situation is not terminal. Personally, I would not sell unless you feel that the added risk is beyond your portfolio’s tolerance. There is no perfect answer here, it’s one of those “it depends” answers. The only investable strategy, although simplistic, is to buy beaten-down quality companies that have been oversold and/or sell positions that are overbought. The market is moving quickly and you need to look around and wonder what is ridiculously cheap… Facebook, Alibaba, maybe Shopify. Figuring out what is mispriced considering the world context is the same challenge we always face, war or no war. There are always opportunities, you just need to find them.

    Looking Forward

    Many think that a war coupled with high gas prices will push the economy into a recession followed by a market crash. Although possible, history says it’s unlikely. Fuel prices alone have never been enough to cause a recession. In fact, there have been all kinds of things wrong in the world and the economy was quite fine. If you factor in the huge amount of cash in the system, the job market starving for employees, and super low-interest rates, you have a good basis for a bet that things will be alright for now. One day that will change for sure but not likely in the next year or so.

    My last comment is that although shocking and sad, this war is regional and while Putin is a scary person with nukes, Russia has defaulted on its debts in recent history (1998) and its economy is overall smallish and unhealthy. For comparison, Russia’s GDP is about the same as Canada’s but it has more than 3 times the population. It’s in no way anything like the Soviet empire of old. It’s a war that they will likely regret.

    On that note, happy investing.

    Marc’s Monthly Moves

    • Nada.

    Marc’s Portfolio YTD Performance

    • Portfolio return -7.6% (Including currency gains)
    • Portfolio return -8.4% (without currency gains)
    • SP 500 return -11.79% (benchmark)
    • TSX return +1.13%

    The portfolio overperformed the S&P 500 by ~ 3.5%.

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  • The Financial Periodic Table

    Originally published February 6, 2022

    Portfolio Update

    It’s been another good month for the portfolio versus my benchmark, however, I am still slightly negative for the year. There has been a lot of volatility in the markets and most of it is playing in my favour as it relates to my more defensive positioning. My over-weighted energy and financial sectors sit at number 1 and number 2 spots for monthly performance while communications and technology sit at second to last and third to last. It’s difficult to say if this trend will continue.

    I sold half of my Activision Blizzard position as it had a one-day gain of 25% after Microsoft announced it was buying it. It’s a complex buy because of the potential for anti-competitive laws that could simply not allow it. So the stock remains about 10% below Microsoft’s purchase price. By selling half I guarantee a large chunk of the sale premium and if the sale goes through I get an additional premium. This position is up in total for about 67%… not too bad for a recent pick.

    I bought Netflix after its 25% fall due to a lackluster earnings report. Bill Ackman who is a renowned stock market player bought 1 billion dollars of the stock shortly after the report. Bill is right 80% of the time. My stake along with Bill’s stake will provide him with some ability to influence the company to make more money. That is the theory in any case. He still has not returned my calls.

    I re-bought Alibaba and then some. There are few companies that on paper look as good as Alibaba. It’s been in the dog house for a while and the stock price reflects that. I am not sure how you can lose on this one in the long run. Time will tell.

    I bought more Verizon. This brings my communications sector up to 10% which is in line with the market weight. Nothing fancy here, good dividend, and Warren Buffet also owns it.

    About the Financial Periodic Table

    I often refer to the financial periodic table (below). No, it’s not exactly science, but it helps investors understand that stocks are based on supply and demand. They go up and down like fashion, something is hot something is not. Sometimes leaders are based on earnings or expected earnings and sometimes ithey are based on human emotions like fear and greed. Either way, it gives you the big picture of how sectors change leadership over time.

    Financial Periodic Table

    Some of my more interesting observations from these are:

    • In the long run, there are no ‘best sectors’ for the investor. They all take turns at or near the top. This is why diversification across the economy is important.
    • Sectors for the most part, over the very long run, have annualized returns somewhere between 6-9% give or take. As you can see below, the last decade has seen a strong and long bull run, not entirely normal with exaggerated positive returns. Certain sectors like technology have overperformed. It was in the number one position in 2017, 2019, and 2020 and although it placed fourth in 2021 it was a very strong return.
    • Reversion to the mean requires that technology place much lower in the future in order to average down its return to historical levels. Maybe it’s different this time? “When will it happen?” is the better question. It’s the main reason I am a little underweight in tech with more defensive positions.

    Looking Forward

    I continue to believe that there will be lots of volatility in 2022 (and maybe opportunity). There are so many moving parts that it’s difficult to say where it will all end up. Certainly, a reversion to normal returns as stated above will make its way to the market one day, but likely not this year. Likely some rotations from strong sectors to weaker sectors will continue to occur. There is so much money in the system that it’s hard to believe that the market could go negative for any real length of time.

    For the Record

    I continue to be underweight in technology and utilities and overweight in financials and energy. The other sectors are normally weighted, including communications, which was underweight till this month. I am also underweight in US positions and overweight in Canadian and international positions. I sense that at some point energy will max out with the price of oil, at which time it will be time to underweight it.

    Happy investing.

    Marc’s Monthly Moves

    BuySell
    Verizon (VZ), more
    Netflix (NFLX)
    Alibaba (BABA)    		Activision Blizzard (ATVI), half

    Marc’s Portfolio YTD Performance

    • Portfolio return -1.1% (Including currency gains)
    • Portfolio return -2.1% (without currency gains)
    • S&P 500 return -5.57%

    The portfolio overperformed the S&P 500 by 3.5%.

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  • Marc’s 2021 Portfolio Returns

    Originally published January 2022

    Not unlike most of the 2021 world Covid dumpster fire, the investment world has also been really volatile, which has been both good and bad. How can it be both? Well, my 19% portfolio return is nothing to sneeze at until you factor in that the SP500 USA index returned about 28% in total. It was a weird year where about 5 big companies (Apple, Tesla, Facebook, Google, and Microsoft) pushed the market up.

    This situation will play a huge role in the underperformance of active portfolio managers and small investors. Said another way, unless you were lucky and concentrated on those exact stocks or were heavily invested in one particular winning sector you likely underperformed. But to be honest, it’s sort of like that every year, just worse this year. The reality is that if my portfolio had been more like the index in composition, I would be a lot closer in performance.

    Guess what? If you were invested in market index ETFs, Congratulations! With little effort, you had a fantastic year. Holding any one or combination of market index ETFs provided you with the following returns: TSX 24%, SP500 28%, or a world index like the URTH ETF at 22%. The argument for market ETFs continues to play out in favour of this style of investing.

    Marc’s Portfolio 2021 Final Returns

    • Portfolio return 18.3% (Including currency losses/gains)
    • Portfolio return 19% (without currency losses/gains)
    • SP 500 return 26.89% plus 1% est. dividends = 28%
    • Tsx return 21.74% plus 2.25% est. dividends = 24%

    Overall, the portfolio underperformed against the S&P500 by -9%.

    2021 S&P500 Return Breakdown by Sector

    • Energy 48%
    • Real estate 42.5%
    • Information tech 33%
    • Financials 33%
    • Materials 25%
    • Health Care 24%
    • Consumer Discretionary 24%
    • Communications 20.5%
    • Industrials 19%
    • Consumer stapes 15.5%
    • Utilities 14%

    Energy is the big winner, but its effect on the index was muted because it’s such a small component. If you had an oversized amount of these (you know who you are) you had a fantastic year.

    Real estate is also a small component and its performance was a big surprise due to the expectation that Covid would crush real estate companies. Real estate companies were busy revamping their world due to new Covid space requirements. Oddly, this created lots of work for these companies.

    Information Tech had another big year and considering it’s the biggest sector it’s also where the game is won or lost for most investors. It also begs the question… will its high returns continue after such a long run? Will growth stocks, in general, continue to outperform? No one knows for sure in the short run but they are getting really expensive.

    For Berkshire fans, BRK.B finally outperformed the sp500 by about 1%. This is great news considering it has been underperforming for almost a decade and was a recent addition to my portfolio.

    My New Strategy

    Is there a new strategy moving forwards? Maybe, sort of. I recognize that there are lots of new risks in the market and moving to a more defensive strategy was likely overdone for 2021. A 9% underperformance is just too expensive a price to guard against tail risks like a crash that may take years to materialize. The new strategy is rather boring, it likely means the same strategy as before except I will bring my sector allocations a little closer to the index. Be more like the Index! At the same time, I need to pay more attention to diversification as well as be more strategic with individual stock picks. I will make adjustments going forwards… slowly but surely.

    How did you do in 2021? Did anyone beat the market?

    Happy investing.

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  • Know Your Portfolio’s Weaknesses

    Originally published December 13, 2021

    Market Observations

    What a wild month it has been. The portfolio started to catch up in all the downward volatility only to fall even further behind when the market ran back up. Some of you also noticed that when the market went up, it did not bring everyone along for the ride. It happens often enough when certain big components of the index drive the market up single-handedly, which is fine if you have a market ETF, but if you don’t own those particular stocks you are out of luck for your own performance.

    The Canadian and international indexes have lagged against the US indexes. The tech sector was once again the number one performer. It’s particularly frustrating for anyone like me who has decided to be defensive. The cost of being different is mounting and there is an argument for adjusting back, at least a little bit, to a more market-like portfolio. It is what it is. For the moment I am moving slowly towards a more index-like portfolio. I will likely continue to make a few moves in the new year. Nothing dramatic, but definitely some adjustments.

    Risks of Growth Stocks

    Some of you got caught in the Docusign (DOCU) fall last week. Docusign, which is the company that leads the pack in providing software solutions for electronic signatures, provided a slightly lowered guidance to their future expectation of revenue. The stock then dropped 40% in one day… ouch. I bring this up to point out that the small investor needs to keep an eye out for positions they hold that may have become risky over time, or maybe were always risky but they did not realize it. Often a position will go up in value very quickly in an exuberant market, beyond its intrinsic value. This is ultimately what everyone wants, but if the story of the company changes, so does the value… quickly.

    Don’t get me wrong, you need some exposure to growth stocks that are based on hopes and dreams, but not too much. These companies are easily identified, since the usual way of measuring them is more difficult as they often have no earnings or their pe ratios are over 35, sometimes in the 100s. How do you value something that makes no earnings? Well, you end up trying to value them in other ways like revenue growth, price per sale, or free cash flow. These are not straightforward approaches to value a stock so there is much more room to get it all wrong. Amazon and tesla are good examples, historically very little earnings were made but huge growth created large companies. What are they worth? They make no money. They just grow, so they are worth something for sure, so the market supply and demand will ultimately determine their value, and it can be volatile.

    Review Your Portfolio for Weaknesses

    So what am I trying to say? A portfolio should be reviewed for weaknesses from time to time. Warren Buffet’s rule number one is to not lose money, followed by rule number two which is to go back to rule number one! It comes down to avoiding big mistakes. Is your portfolio solid? Or are you holding too many Tesla or Docusign companies? There are other ways to murder money as well. These include holding too few sectors (not being diversified), holding too much cash, holding too much fixed income, like bonds, or too many income stocks like REITs that are interest rate sensitive. As I said earlier, I have no issue with holding a stock like DOCU or Tesla, but it has to be part of the more speculative portion of the portfolio, which should comprise no more than 5% for most people. If things go bad, it’s not the end of the world. I know someone whose wealth is almost entirely based on Bitcoin. He has been lucky, but luck can run out quickly.

    My Portfolio Weakness

    Where is my weakness? I believe I have become too defensive which has caused some serious underperformance. I simply do not think at this point that being so defensive is going to be worth it in the long run. I think the strategy to be defensive is sound, but I think I perhaps took it too far without realizing it. At the same time, I do not want to swing too far the other way and expose myself to the risks that I have been trying to avoid in the first place.

    In the future, I will likely continue to increase my tech and coms positions, so stay tuned.

    Calculate Your Annual Performance

    Finally do not forget that it’s year-end. Take note of your dec31 portfolio value to determine annual performance this year and to create the starting point for next year. If you don’t do this annually, it’s like driving without gps, or headlights, etc…

    Happy investing.

    Marc’s Monthly Moves

    I have sold BABA as a tax-selling move. I will likely buy it back in 30 days. I have purchased Google to increase my communication sector, which is underrepresented. Google is a giant monopoly, high quality, and still growing.

    BuySell
    Google (GOOG)Alibaba (BABA)

    Marc’s Portfolio YTD Performance

    • Portfolio return 17% (Including currency losses/gains)
    • Portfolio return 17% (without currency losses/gains)
    • SP 500 return 25.45%
    • TSX return 19.83%

    The portfolio underperformed against the SP500 by -8.45 points.

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  • Should You Get Professional Wealth Management?

    Originally published November 17, 2021

    I decided this would be a good post to share my thoughts about professional wealth management. I often get a lot of questions about this. But first, a bit about my underperforming portfolio.

    My Portfolio Continues to Underperform

    The portfolio continues to underperform, gyrating back and forth but getting a little worse. After a review of my strategy, it appears that for the most part, I have the big picture correct. I overweighted energy and financials, which both are the number 1 and 2 performers year to date. So why am I still underperforming? The problem does not lie in this part of the strategy, but in the de-risking of my information technology sector component. If you recall I underweighted the tech sector and paired down high flyers like Shopify and Kinaxis, replacing them with unloved positions like Verizon and Intel. It’s a good strategy if you expect the risky information technology sector to crater, however until now, this sector continues to do relatively well. My undersized and unloved version of the sector within my portfolio did much worse as a result. The unfortunate reality is that the information technology sector along with its cousin, the communication sector, represent almost 40% of the SP500 market.

    So why does that matter? The market has such a large proportion in the information technology sector that the game is mostly won and lost by getting that one sector right either by weight or by having the right stock picks, of which I have neither. Is my approach safer? Yes, but it comes at a cost.

    Am I ok with this? Sort of. There is no way around it. If you want to de-risk, you have to expect to underperform for a while. I identified this possibility early on and it is exactly how it played out. My return is actually good for the amount of risk I have and this is why not all returns are the same, even when they are identical.

    The Case for Professional Wealth Management

    This part is where I awkwardly try to tie in Wealth Management Fees.

    Why I Use a Wealth Manager

    Marc why do you pay a wealth manager x% per year and underperform the market? Don’t you usually beat the market with your own hobby portfolio? Great but annoying questions!

    As many of you know, the majority of my retirement fund (85%) is managed through TD Wealth. I often get slack from my investor friends for paying an annual management fee to TD. Particularly when the returns in my hobby portfolio almost always exceed my TD Wealth Management returns. Why don’t I just manage the whole thing?

    The reason I do this is that TD Wealth provides a slightly less than market like return with a much more solid (read boring) portfolio. The idea here is that the TD portfolio would be more resilient in any market decline. Being retired with no other income, I require a financially sustainable path to my death in 2072. Basically, I have chosen the higher-quality portfolio that TD Wealth provides with a slightly lower return. It’s a trade-off, just like de-risking the hobby portfolio.

    It’s a similar approach for those who hold Warren Buffet’s Berkshire Hathaway. Berkshire has underperformed for almost a decade, but when you look deeper, the return for risk is really good. No one will end up having to eat cat food if you are invested in BRK.B. Could Warren, TD Wealth and I all over-perform in the future? Yes, but the market temperament has to change first. Right now, the market values high-growth stocks with a higher risk profile. The day when value-style stocks flourish will come, but it may take a while.

    Could I manage a similarly lower-risk portfolio and save the management fee? Yes, I could, but it would be boring, and I would not be as good at it. I would also not manage the entire amount the same way that I manage the hobby portfolio. Once it becomes serious and important to my life, it loses the fun hobby aspect. Would I trade options? No sir, that’s my future that I am messing with. Would I build strategies that overweight sectors as I do now? Hmmm, maybe not as much. Unlike most people, I do not work and cannot make up for mistakes with time and a paycheck. Once in the retirement zone, you certainly have to be more conservative. That’s why I have a hobby portfolio to play with, which is independent of my wealth account.

    The other benefits I get from the TD Wealth Management account are:

    1. tax strategies (I suck at those).
    2. no dumb mistakes, such as my GME option fiasco, holding too much cash, or emotional buying and selling.
    3. no monthly portfolio decisions (selling stocks every month to cover my retirement expenses.
    4. no dividend income forecasting – they do that for me.
    5. future projection modeling.

    Wealth Management is a personal choice. I’m retired and prefer to spend my time doing other, more fun things than managing my retirement account every month.

    A few other important things to keep in mind:

    • The portfolio management fee is tax deductible for non-registered accounts, so the fee is actually under 1% for me.
    • Wealth management is also more affordable the more money you have under management. Fees range from .75 to 2% annually depending on your institution.
    • It cost money to be in the market, even if you are doing all the work yourself. There are trade fees, admin fees, ETF fees, mutual fund fees, and tax withholding fees, some of which can exceed 1% annually.

    Other Reasons to Consider Professional Wealth Management

    If you chronically underperform the market, then Wealth Management is totally worth it. The difference in performance usually makes up for the fees and then some.

    Quick note: Wealth managers are just like mechanics, some are good, and many are not. Best to be choosy, as performance will vary.

    Alternatives to Wealth Management

    Holding a couple of key market ETFs could provide a better return if you’re ok with the associated market risk.

    If your return expectations are really low, i.e. you want dependable low-risk returns by having half your portfolio in fixed income and the remainder in dividend stocks, then you simply are paying too much for that low safe return. If your trying to achieve 4% and now you pay a 1.5% management fee, that is expensive! A Wealth Manager, in this case, is barely working and still collecting a fee. You need more performance (and risk) to make it efficient.

    Final Thoughts on Wealth Management

    In the end, there are many ways to skin a cat, and investing is a personal endeavour that really needs to be done with consideration of your individual needs. I know what works for me, but everyone is different with different risk tolerance, and return expectations. The situation I see too often is small investors who underperform the market by quite a bit with high-risk portfolios but cannot accept the idea of paying a fee for something they already do. So you underperform by 5% but save a 1% management fee. Are you really ahead?

    Happy investing.

    Marc’s Monthly Moves

    If you got this far down, apologies, this got wordy. On a lighter note, my recent picks like Cameco and Krane shares ETF have both taken off with 45% and 25% returns respectively….in just a few short months. As noted above, I have increased my position in Krane shares as there seems to be growing interest in the carbon credit market.

    BuySell
    KraneShares Global Carbon Strategy ETF (KRBN), more

    Marc’s Portfolio YTD Performance

    • Portfolio return 18% (Including currency losses/gains)
    • Portfolio return 19.5% (without currency losses/gains)
    • SP 500 return 25%
    • TSX return 25%

    The portfolio underperformed against the SP500 by -5.5 points.

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  • My Portfolio Update

    Originally published September 2021

    The Big Picture

    The investment world continues to buzz about the market being overvalued and there being an eminent crash or worse, a decade of poor or negative returns. At the same time indexes continue to gain week by week. How can the market be both about to collapse and continue to rise at the same time? If everyone truly believed that the market was going to go bust, everyone would obviously bail, but they have not. The reason for this is complicated, but for the most part, it comes down to the fact that no one really can predict the immediate future. Overall this year’s returns are looking super, though that is not the sentiment on the street. As always, the smart investor stays in the market no matter what, through the good times and the bad times knowing that their time in the market that will eventually provide good returns.

    The Small Picture

    The hobby portfolio’s performance has emerged from what would seem to be a bad dream. It’s no longer losing ground to my benchmark, the SP500, and in fact, has gained ever so slightly. Hopefully, this trend can continue. I apologize that there was no newsletter in August… me bad and life got busy. I don’t get paid enough to guarantee a newsletter every month, lol.

    One New Purchase and One Old

    I have added MSOS, a cannabis ETF, to the portfolio. I have been historically anti-cannabis stocks due to the high prices and high volatility. What has changed? Pot stocks are out of favour right now and stock prices keep falling. Could they continue falling? Absolutely but after an almost 50% fall from their previous highs, it seems like a good entry point. The legalization of cannabis in the USA continues to move forward but slower than most had expected. If the trend continues I could forsee the day when Americans can buy pot stocks legally on the main stock exchanges. When the move to list these companies on mainstream exchanges occurs, there will likely be a pent-up demand situation where stocks could get bid up. As a result, I do like the long-term chances going forwards.

    On the volatility side of the equation, I have chosen an ETF instead of a single stock position. This will obviously lower the chances for a huge homerun return, but it will also ensure that I don’t end up murdering money with a bad luck pick. This is not a casino after all.

    I double downed on Alibaba (baba) the Amazon of China. It’s been out of favour for quite some time and my losses are mounting. Buying something out of favour is difficult because it usually continues to fall and it drags down returns. However, if the investment strategy is solid, then sometime in the future when trends reverse, you get over performance. Buy low sell high… simple but often difficult and generally counterintuitive to achieve. Patience and discipline are hard at work here and are obviously being tested. This purchase averages down my cost basis, which is good if things work out. If the outlook remains bleak, then in hindsight the purchase will look like I threw perfectly good money after bad money. In the end, they can’t be all winners, but as long as your winners win more than your losers lose, then it’s all good.

    I sold off my small cap ETF VTWO. I still like it, and it has provided good returns – 15% over 6 months. However, I needed to pay for new purchases with something…always a compromise!!

    My new uranium play Cameco (CCJ) is up 16% in six weeks, not bad, but it’s really just good luck and luck can always run out. It could have easily fallen just as much as is often the case for out-of-favour stocks.

    My Morning Brew Recommendation

    Some of you already have “Morning Brew”, a daily financial newsletter. If you can get past the obvious ads, it does provide a daily pulse of what’s going on and some entertainment as well. It’s free, so no cost to you. You can find it here.

    Happy investing.

    Marc’s Monthly Moves

    BuySell
    MSOS Cannabis ETF
    Alibaba (BABA), more    		Vanguard Russell 2000 Index Fund ETF (VTWO)

    Marc’s Portfolio YTD Performance

    • Portfolio return 15% (Including currency losses/gains)
    • Portfolio return 16.6% (without currency losses/gains)
    • SP 500 return 20.75%
    • TSX return 19.43%

    The portfolio underperformed the SP500 by -4.15 points.

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  • The Cost of Being Different

    Originally published July 18, 2021

    As most of you know, I have restructured the portfolio to be more defensive, i.e., I paired down high flyers like Shopify, Kinaxis, and Amazon, deviating away from communications and tech companies while increasing financials and energy. This deviation is a defensive move to counter the historically frothy market, particularly in the tech and communications sectors.

    My Defensive Position

    Early in the year, this strategy put me ahead of my benchmark as Mr. Market got spooked and punished high-flying tech. However shortly after, technology and communication stocks again continued leading the way forward, and to add insult to injury, it was at the expense of financials and energy of which I have an overabundance. This is completely the reverse of what is best for my portfolio and seriously threatens my plans to get that small business jet that I do not need. I mentioned in a previous newsletter that this strategy would likely cause some underperformance and that this would simply be the cost of being more defensive. My returns are still good, but the difference keeps growing, especially in the last 6 weeks!

    Is the Strategy Worth It?

    It’s hard to say. My ETF friends are all outperforming me without lifting a finger. The market and economy are pretty nutty, but where is it going to end up? Unfortunately, there are no clear answers. It could continue like this for quite some time. All I do know is that we are into some uncharted territory as it relates to the economy, so one should proceed with caution. If things go bad, or there is a sector rotation, the portfolio will likely be a winner, but until then it will likely stay a loser.

    What is the Small Investor To Do?

    At the very least, we should avoid making dumb mistakes like concentrating all our money in one or two sectors, or worse, getting caught up in high-flying stocks as these could reverse direction and our money could be permanently murdered. There is plenty of argument for an eventual long protracted pullback to return valuations to normal levels and that would see all sectors suffer with no place to hide… maybe for years. Statistically the sectors that went up the most almost always come down the most. The market could also simply just keep going up, at least for a while as high valuations are not indicative of future returns in the short run.

    At this moment the stock market is the only game in town as fixed income provides a negative return when you factor in inflation. Lots of fixed income dollars have and continue to jump the fence into the equity pasture and are now also chasing stocks higher. Getting out of the stock market (timing) is not the answer either as it will lower your returns by average because no one can time the “out” and the “in” correctly. So you’re left with:

    1. “be the market” (invest only in market index ETFs);
    2. be defensive (lots of diverse high-quality boring stocks); or
    3. keep investing like it’s 1999 and make as much money as possible before it comes to a sudden stop.

    FYI, I chose number 3 during the dotcom bubble, it was fun, but you all know how that ended. At this moment, if you agree that choice ‘3’ is dumb, then choices ‘1’ or ‘2’ are the only sensible approaches. I am not saying that there is a crash around the corner (there always is given enough time) but there are a lot of warning signs, enough to at least be cautious.

    My Portfolio Changes

    In light of the above, I have continued my broad diversification strategy by adding Cameco and KRBN. Cameco, the Canadian Uranium miner, has been in the dog house ever since the Japanese had a small incident involving a nuclear meltdown (apparently a big deal). The stock is up quite a bit recently but the long-term outlook for nuclear is changing, particularly as the pressure to lower carbon emissions continues to increase. There are a number of new nuclear plants that are safer and more affordable and that are coming online in the next couple of years, which will increase demand for uranium. This is a long play.

    KRBN is a carbon credit ETF. Following the same theme as above, where you can see the world trying to lower emissions, the necessity to purchase carbon offsets will eventually become a thing. At the moment, the carbon credit market is small and there are only a couple of ways you can invest in it. Could this be the ground floor? Maybe. Like all markets, there is a supply and demand aspect that determines the price. Big companies like Google, Disney, Barclays, and Microsoft are all buyers trying to become leaders in the fight against climate change. As more and more companies green up by choice or by legislation, demand will go up, and hopefully so will prices. This is a new market, so I would say that there is a more speculative aspect to this position.

    For those of you in the ETF world, I recently helped set up a friend’s portfolio with a simple ETF combination. URTH and XIC.to capture the MSCI world index return (URTH), which also includes a big USA component plus a Canadian index market ETF (XIC.to). This combination is so simple and will provide market-like returns with extreme diversification. It’s actually outperforming my portfolio… for now.

    I added back the GME GameStop put option, (a bet that the price will fall) after selling it last month at a big loss for tax purposes. It’s worth just 300 odd dollars and is inconsequential on a cost basis, but its value in education is priceless and if the odd chance it does fall dramatically I could be a big winner.

    The Best Types of Investors

    Some trivia about the best types of investors I picked up from a podcast. The best investors tend to be independent thinkers, are likely never involved much in organized sports, but prefer individual sports like swimming, cycling, parasailing, windsurfing, etc. They are usually not as emotional about losses, care less about what other people think, and have stronger self-discipline. They also tend to trade less and have long-term strategies that make sense. They try not to follow every detail of how the market churns day in and day out. These are generalizations and may not apply to you, but it gives you an understanding of how emotions and personality affects the way you do things, including investing.

    Happy investing.

    Marc’s Monthly Moves

    BuySell
    Cameco Corp (CCJ)
    KraneShares Global Carbon Strategy (KRBN) ETF
    GameStop (GME) Put Option

    Marc’s Portfolio YTD Performance

    • Portfolio return 9.2% (Including currency losses/gains)
    • Portfolio return 10.2 % (without currency losses/gains)
    • SP 500 return 15.2%

    The portfolio underperformed the SP500 by -5 points.

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  • Why I Suck at Investing… Sometimes

    Originally published June 5, 2021

    Everyone makes mistakes and it’s up to the small investor to accept these as part of the learning process. It’s only human to avoid thinking of these train wrecks and move on as fast as possible, but that would be a lost opportunity in learning something.

    My Mistake

    I am referring to the sale of my Game Stop option in which I murdered 85% of my capital. So where did I go wrong? For the most part, I reacted too quickly to an opportunity that I felt had a limited-time offer. The stock was catapulted beyond logic by a group of amateur investors leveraging social media. Betting against them sounded like a sure thing at the time. That being said I purchased a complicated option without fully understanding the mechanics of the trade. Essentially I was betting for a large move in the stock in the down direction. This did occur – it fell from over 300$ to 40$. However, the volatility premium that I paid for the option was so high that it overwhelmed the effect of the move down creating very little added value in the option. The volatility then fell and the stock rose, basically eroding the volatility premium I paid so much for.

    So What Did I Learn?

    Do not jump into something without doing your due diligence. Remember that the seller of options has the advantage. Know that even if you have the right direction, magnitude, and timing in an option, you can still lose on something else like volatility. Three out of four factors were correct, but that was still not good enough…..it usually is.

    Why did I not just hold till expiry you ask? My wealth advisor, who manages my retirement portfolio, asked if I have any potential capital losses in the hobby portfolio as he is having a good year and will likely be declaring net capital gains on the account. This creates a tax burden for me, which can only be offset by a capital loss. By selling the option I create a capital loss, and this will offset the gain at tax time next year. Generally, you can expect the offset to gain you back about 15 to 25% of the loss depending on your marginal tax situation. It’s not a lot, but everything helps.

    The Strategy

    The strategy for this position is not over. Effectively I still believe that GME will fall in the future and it’s still a viable bet. The plan is to wait the required tax selling period of 31 days and repurchase the option. This allows me to keep the capital loss deduction and continue the trade as a new position. I am assuming that all will remain equal for 31 days, but who knows what will happen in the future, so I will have to assess the market situation and make sure the bet is still viable. In any case, repurchasing it will be only a few hundred dollars so I am doing this more for educational purposes to see how the story eventually plays out. It’s not statistically very important in the bigger picture.

    How Do You Protect Yourself… From Yourself?

    That is really a difficult thing to do and to me, the answer lies in the discipline or a set of rules that you attribute to investment decision-making. In my case, I had already declared that the GME option would be a speculative position and as a result, should never exceed 2-3% of the portfolio (my own rule). To be clear, all speculative positions combined can never exceed 2-3% of the portfolio. In this case, GME represented about 1% of the total value of the portfolio. This rule as simple and ensures that if things go wrong, the worst-case scenario will not ruin your returns for the year or future years. A total loss, in my case (pretty close actually), means that 99% of the portfolio survives and the loss is barely noticeable in the big picture. One percent can easily be made up in other years with good decisions and a bit of luck… it’s not terminal.

    I will throw in one of my other related rules. No regular position within a portfolio should exceed 5% of the total. The same logic applies here, in that should one of your positions go bankrupt or fall into a sinkhole, 95% of your portfolio survives and again the loss can be made up. As an example, should you only have 3 positions in a portfolio and one of the three goes bankrupt, you will likely never recover and in hindsight maybe you should have bought a market ETF. The 5% rule lowers your diversification risk by ensuring that you have at least 20 stocks and as a result, lowers your annual standard deviation (how much your portfolio zigs and zags).

    If you applied these rules to your portfolios, would you pass my tests? Do you even know? Maybe you have a few too many Bitcoins, Tesla shares, or AMC. Maybe you are too concentrated in one sector (remember the tech bubble circa 2000). It’s easy to get enthusiastic about a particular stock or type of stock and then buy too much, or maybe your stock skyrocketed and without knowing it, your portfolio now depends on how well Tesla does as most of the value of your portfolio is concentrated on one stock.

    Happy investing… oh, and try not to suck.

    Marc’s Monthly Moves

    BuySell
    GameStop (GME) Put POption

    Marc’s Portfolio YTD Performance

    • Portfolio return 5.8% (Including currency losses/gains)
    • Portfolio return 11.0% (without currency losses/gains)
    • SP 500 return 12.6%

    The portfolio under-performed the SP500 by -1.6 points.

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  • Are REITs Low Risk?

    Originally published May 20, 2021

    I don’t think there is anything inherently evil about Real Estate Investment Trusts (REITs). I have owned them in the past…they can be great depending on what you need them for. Generally, this asset class along with utilities, bonds, and some big stable low growth dividend companies attract those investors that want reliable low-risk incomes. The better question is are they really low risk?

    The answer may be surprising because most investors think that no matter the situation they can count on those dividends or monthly REIT payments and all is well. The biggest problem is the underlying value of the asset can change depending on the interest rate situation. They tend to be interest rate sensitive! It’s nice that your income keeps coming in, but if you’re losing 20% on the stock every year, the payout/dividend is not going to make up for the loss, leaving you feeling a little on the poor side.

    You may be wondering, how can all these different asset classes act the same way when they are all different businesses? Its Math! These assets provide a stable income with little underlying growth. It’s no different than a simple Bond, and Bond values vary with interest rates. So mechanically they must all act in a similar way. If your asset pays 2% annually and rates rise from 2% to 4%, then no one will want your asset when they can just buy a new one with a much higher rate. The only way to entice someone to buy your unwanted asset is to drop your price until it ends up paying a similar return as the higher rate. Mathematically, a move in interest rates from 2% to 4% would drop your asset value in half to make up for the higher rate that the new bond gets. This is a simplistic view of how this type of asset gets priced in a rising rate market as there are other factors involved such as risk, payout ratios, free cash flow, etc. Nevertheless, conceptually this is how it works. This phenomenon also affects regular stocks but at a much smaller magnitude. Stockholders are enticed to switch to bonds for higher returns, which lowers the demand for stocks and lower stock prices follow.

    In our low-rate environment, one could argue that there is no other place rates can go but up. In fact, inflation has started to increase in the USA and that could lead to higher interest rates should the economy get overheated. At the same time, governments have messaged that they expect to keep rates low for a long period to kickstart and support the stalled economy. Raising interest rates would be bad for governments because they have piled a lot of covid debt on their books. The carrying costs (interest payments) of those debts are manageable only because of near-zero short-term rates. If inflation gets out of hand, they will increase rates to counter this and cause mayhem in the markets.

    Should You Dump Your REITs, Bonds, AT&T, and Utilities?

    The answer, like always, is “it depends”. Interest rates may not go up much and remain stable for years, but maybe not, no one knows for sure. Investing is a probability game, not a certainties game so I generally make my investment decisions where the likeliness of being right over time will be in my favour. My view is that given enough time it’s likely that rates will rise after decades of falling. This is why I do not own any of these right now. But what if I am wrong? A question you should always ask. The effect of being wrong would be limited because a well-balanced portfolio would only have a small weighting of these assets anyway, definitely less than 10%…. more likely around 5%. That being said, being wrong would not cause a substantial loss and my other assets could potentially make some of that up. If I am right, I will outperform a bit, and a bit is all I need.

    Where is the hidden danger for the small investor?

    Anyone who has loaded up on these assets or is practicing a traditional 60/40 split of stocks and bonds could see substantial volatility over time should rates increase. Should we panic? Only if you have too many. If you have a small amount as you should, there is no rush as rates increase slowly over time. You will see a slow deterioration of your asset values but you will still be collecting income to offset this. Eventually, most assets provide similar returns over the long term. The problem is that most investors lose patience and sell losing positions right when they are ready to turn around. They buy high and sell low.

    Warning! Not all reits and utilities are the same. I have generalized the world in this newsletter and it’s never quite so simple, as there are many REITs that can have decent growth and are less sensitive to changes in interest rates. I prefer these types as they act more like conventional stock but have a smaller monthly payout or dividend compared to the traditional REIT.

    Looking Forward

    I continue to have difficulty in reading my crystal ball. The market sounds expensive if you listen to “experts” and of course, there are many warnings that come when you’re flying so high. I would say that there are some frothy areas in the market, but these are strange days and evaluations may stay like this for a very long time. Other than real-estate , like your house, there is no other game in town when it comes to longterm performance. So can the market crash? Of course, it eventually does, but no one knows when or how big. Trying to time an exit because the market appears expensive and therefore scary only lowers returns in the long run. You are likely going to be wrong getting out, and likely wrong getting back in, and in the end, only luck will determine if you have made the right choices. I do like luck but I would never bet on it and prefer to ride out the long term fully invested where I know that I will do fine.

    Happy investing.

    Marc’s Monthly Moves

    Nada.

    Marc’s Portfolio YTD Performance

    • Portfolio return 3.9% (Including currency losses/gains)
    • Portfolio return 8.6% (without currency losses/gains)
    • SP 500 return 9.57

    The portfolio underperformed the SP500 by -1.0 points.

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