Brett Girard in the Globe and Mail on December 22, 2017
Investors, don’t give in to the fear of missing out (link) by Rob Carrick
All posts by EZMarketing
BNN Market Call Tonight – January 11, 2018 – Top Picks
BNN Market Call Tonight – December 28, 2017 – Top Picks
Client Question: How do you invest to deal with the recent disruptive or destructive technology trends?
While Amazon may get the most press for disrupting industries and economies around the world, there are plenty of companies making their own waves on this front. The way to go about investing on the right side of these trends is to think: what companies can Liberty investors own today that will still be around in 10 years to benefit from the growth in their free cash flow and dividends? And what sectors should be avoided?
The sectors we are currently avoiding are energy, telecoms and most utilities that don’t have much exposure to renewable energy.
Their growth could wane quickly – if it is 5, 10 or 15 years from happening, investors should do a discounted cash flow valuation of these stocks. If the valuation reaches that price, they should sell the stock.
Or they could face the “Last Man Standing” scenario, whereby the last purchaser of Nortel or Valeant stock at its peak saw the stock move only lower.
Below is a table of the current investment trends for the future. Unlike the bubble that burst in 2000 that sent technology stocks plummeting, these companies all have real and growing revenues, profits and free cash flows:
| TREND | LIBERTY STOCKS INVOLVED IN THESE SECTORS |
| Water | A.O. Smith, Lindsay Corp., Danaher Corp. |
| Agriculture | Agrium, Lindsay Corp., Raven Industries |
| Healthcare – Pharma | Novo-Nordisk NV |
| Healthcare – Medical Devices | Becton Dickinson, Atrion Corp., Coloplast A/S, Globus Medical, Stryker Inc. |
| Other Medical | Balchem, Mesa Labs, Steris |
| Fintech | Chubb, Fairfax, Great-West, TD Bank, First Cash Financial, Paychex |
| Robotics | Cognex Corp., Danaher Corp |
| Life Sciences | Danaher Corp., Thermo Fisher Scientific |
| Logistics | Dassault Systemes, Roper Technologies |
| Artificial Intelligence | Dassault Systemes, Open Text, Shopify Inc., Cognex Corp. |
| Government Regulations | Halma plc., Intertek Group, Spectris plc. |
| Renewable Energy | NextEra Energy, Novozymes A/S |
| Infrastructure | Toromont Industries, Stantec, Roper Technologies |
| Aerospace | Heico Inc.,RBC Bearings |
| Automotive Computerization | Littelfuse Inc. |
Client Question: What kind of returns may I expect from my investments?
The first thing investors need to understand is that risk and reward walk hand-in-hand. Therefore, the higher the risk, the higher the range the returns should be. Unfortunately, it works both ways – you may earn big returns or suffer big losses.
When considering the appropriate asset mix for your portfolio, check out the table below provided by The Vanguard Group. It considers Canadian equity and fixed income returns from 1985 to 2013.
On the far left is an asset mix of 0% equities and 100% fixed income. The range of returns for that mix is +21.2% to -4.5%. This mix would be appropriate for investors who want little to no risk as the greatest downside return is a 4.5% loss in any one year.
As you add equities to the mix, note that the range of returns increases. For a 50% stock / 50% fixed income portfolio, the range of returns widens from +24.6% to -13.0%. And for a 100% equity portfolio, the range of returns becomes the greatest, from +35.1% to -33.0%.
That’s why, generally speaking, those who invest all in equities tend to be under the age of 40 because they have time on their side to enjoy the compounding that 30-50 years provides.
Client Question: What do you think about the FAANG stocks?
This year, the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have enjoyed an average 47% return, well above the market averages. The reason we don’t own them is three-fold:
- They make up a large portion of the Dow Jones Industrial Index and the S&P 500 Index, meaning every ETF owns them. What you usually end up with is a reversion to the mean. The more shares that must be bought with each investor purchase of an index fund, the more the performance tends to follow an “average” return.
- Stocks like that usually signal their price peak before a precipitous fall. Just ask shareholders of Nortel, Royal Bank and Valeant. They once were the largest holding on the TSX Index but soon fell in value after the peak.
- We prefer to own stocks that aren’t widely held by investors. This gives us a chance to get in early. We can enjoy gains based on the company’s own performance and when they are added to an index or grow enough to attract more eyeballs to the stock, the returns can continue to rise at a greater rate for a longer time. In our US stock portfolios are 5 names that have outperformed the FAANG stocks this year:
| FAANG Stocks | 2017 Performance (YTD at 12/01/17) | US Liberty Stocks | 2017 Performance (YTD at 12/01/17) |
| 52% | Cognex | 115% | |
| Amazon | 55% | Graco | 55% |
| Apple | 47% | Globus Medical | 49% |
| Netflix | 51% | Raven | 47% |
| 29% | Atrion | 33% | |
| Average Return | 47% | Average Return | 60% |
| Data courtesy of Bloomberg LLP | |||
Client Question: Why should I own foreign investments?
Canada may be a great place to live but according to 2017 data from the IMF the Canadian economy makes up only about 1.4% of global GDP. By investing only in Canada you are turning down an opportunity to invest in the other 98.6% of the global economy.
Beyond that Canadians face two major problems at home:
- The TSX index isn’t diversified – financial and resource stocks make up 65% of the index. Remember that correlation risk is the biggest concern when creating portfolios. The higher the correlation, the greater may be the stock losses.
- The Canadian dollar’s dependence on oil and gas prices leads to greater currency volatility. If you earn only Canadian dollar income, whether or not it’s employment or pension income, you are exposed to Canadian dollar fluctuations.
For example, the Canadian dollar began its descent in 2014 from one dollar to the USD to today’s 77 cents on the back of declining oil prices. As a result, Canadians’ spending power relative to the rest of the world fell 23%. In other words, if food costs in 2014 were $1.00, they’re now $1.23.
That’s where foreign investments help offset the decline in spending power. If your investments are in other currencies and the Canadian dollar falls, those investments will be worth more, thereby creating a natural hedge to your spending power.
The bottom line is this: When the Canadian dollar is strong (at par), buy foreign investments. When the Canadian dollar is weak (as it was in 1995 during the Quebec Referendum at 60 cents), buy Canadian investments and wait for the cycle to turn.
Client Question: What’s the biggest risk in my DIY portfolio?
Here’s a commentary by Cormac Mullen of Bloomberg News on September 14, 2017 about “cluster” risk:
“Cluster risk, occurring when performance patterns become correlated among a group of stocks with similar business profiles yet different sector classifications, is a hazard that can often slip under a risk manager’s radar, AB’s David Dalgas, Klaus Ingemann and Thomas Christensen wrote in a blog post.”
“Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google owner Alphabet Inc. — collectively known as the FAANGs — are a prime example, AB said. Together the mega-cap stocks accounted for more than a quarter of the gains in the S&P 500 from the beginning of the year through August and have become increasingly correlated.”
The danger of this correlation risk is when the market falls, this group will fall together with similar losses. It’s also like owning all the Canadian bank stocks.
The moral of the story is to buy one but not all the FAANG stocks or Canadian banks. Most do-it-yourself investors and even some professionals fail to protect their overall portfolio risk by owning stocks that are similar in nature to each other.
It’s better to have a compilation of names that are in different industries, different countries and are of a different size. This diversification should help protect the risk of a big loss. After all, investing is not about how much you make but how much you avoid losing. It’s the latter statement that keeps you in the game for the long term.
Client Question: Why does the market often take off at the end of the trading day?
Near the end of the trading day, about 2:30 p.m., markets can pick up in both volume and breadth. That’s because Exchange-Traded Funds (ETFs) have to execute their buys and sells based on cash received or demanded during the day.
Below is a chart that shows trading volumes on the S&P 500 during the average trading day:
It’s important, therefore, that investors understand this relationship. If they, too, are buying during periods of high trading volume, they may pay more for their stocks than expected. For example, if trading volumes increase, the bid/offer spread could widen. Instead of paying an extra five cents a share to buy or sell, it could change to 10 cents a share. Investors should also avoid trading in the first hour after the market opens as that is another volume surge. We prefer to trade when volumes are lower and there’s more consistency in the markets.
Client Question: How do you invest a new account?
We take our time with new clients’ money. Some firms may invest all the money immediately because they counsel against trying to time the market but depending on the market situation, we believe that some prudence is required. Usually ½ positions are purchased in equities, with the remaining 50% allocated depending on what happens later in the market.
According to Lu Wang of Bloomberg News on October 1, 2017: “Theories abound as to why the fourth quarter is so often the best one for equity bulls. Fund managers need to catch up, holiday spending spreads cheer, investors celebrate the January effect in December. Or maybe it’s just dumb luck. Whatever the case, the S&P 500 Index has risen seven times in the last eight years between October and December. And while calendar effects just took a beating with a volatility-free September, betting against any form of momentum remains a losing trade until proven otherwise.”
Also, as noted above, calendar returns from October to October rather than January to December tend to be above-average, especially among the small-cap stocks. Looking at our global stock holdings, the average growth rate from October to October since 1990 has been around 21%. This compares to the index averages of 8%. We believe that is a significant number. Does it always grow at this rate if money is added each October? No, the success rate of the past 27 years has been about 75% (18 of 27 years) but the odds do favour the investor.