Hope everyone had a great weekend. We had our niece over to our house for a “Covid style” graduation party on Saturday. Not high in terms of scale of loss, but kind of an anticlimactic way to finish off high school this year and I thought Victoria would have been disappointed to miss out on a traditional graduation. Was pleased to hear that she was good with sharing it with just close friends and family and that she was actually very happy that she was able to get in five hours of pictures in multiple locations instead of just a “quick” two-hour pre-party photo shoot. She said it made all the time invested in hair, makeup, and dress more worthwhile – that girl understands the time/value equation well! It was a fun way to cap off what has otherwise been a heavy week.
We really are living through history. Covid put our world on pause and pushed us in to a time of reflection and reinvention. Forced to redefine our definition of success as we can no longer measure it based on productivity. Forced to figure out new ways and learn new skills for how we show up and do business, interact with family, socialize, and recreate. And then in the midst of adapting to pandemic living, we get the George Floyd death. Now on top of a pandemic, we have mass protests, rallies, and civic unrest shining a giant spotlight on police brutality and racism and pushing us into a further place of introspection to really think about and test our beliefs on inequality, injustice and humanity. Heavy issues, but I can’t help but feel optimistic that a time of self-reflection and re-invention is going to have a positive outcome in terms of moving us forward as a society. Not sure I am saying the right things, but I know that we are having more deeper and meaningful conversations with my kids and friends in these past couple months than ever before and I know that we are not unique in this. I cannot help but think that just having these conversations and listening to alternative perspectives and being intentional in forming and articulating our values, beliefs and viewpoints is important. I’m not an expert on social issues or activism or justice, but I know both openness and optimism help. Optimism is the foundation of hope and I really believe that hope for our “new normal” being better is going to keep us moving forward.
Sadly, I am beginning to think that I can’t really consider myself an expert on markets these days either as they continue to defy expectations and had another strong rally last week. I take some solace in that every economist/analyst and so-called expert I followed had egg on their face after the jobs report for May came out. Guidance was for an expected 7.5 million additional job losses in the US, but the reality ended up being 2.5 million jobs were created. Trend was mirrored in Canada and in BC. Caught everybody by surprise and markets were up 5% last week. The Dow Jones is now just 10% below what it was pre pandemic.
The speed of this market has literally been breathtaking. I have been in the business for over 20 years and in that time have gone through the tech bubble bursting, 9-11, and the 2008/09 subprime mortgages crashes as well as the normal corrections and runs implicit in a regular market. Nothing has come close to what we are experiencing right now. In the last 20 years, over all the many different corrections and crashes, the market has taken an average of 176 days and lost 27% to decline to a low – this time it took 33 days to fall 35% . On the upside, in recovery, it typically takes about 74 days to get half the loss back – this time it took 17 days. Unprecedented times make for unprecedented markets!
I spoke a few weeks ago about the markets segmenting a bit into the haves and have nots as trends that were already present pre-pandemic have accelerated shifts in business. E-commerce, virtual work and health care stocks were at record highs. Markets are playing a bit of leapfrog right now as the last couple of weeks rally has been driven by the most distressed stocks. Airlines, cruise ships, mall based real estate companies and energy stocks have had a great couple of weeks as investors gain confidence in the narrative that the recovery is real.
It is getting a lot harder to identify clear opportunities. I think it is important now that any new money coming in is diversified properly and goes into multiple ideas. Still some value out there in terms of companies trading below where they were a couple of months ago, but that discount has closed up enough that I wouldn’t want to be simply trawling for cheap opportunities and passing up on companies with growth and momentum on their side. Zoom just raised their guidance for revenues from $900 million to $1.9 billion. Businesses will continue to re-open, but the new normal is going to incorporate a lot more e-commerce and virtual meetings than ever before!
We don’t have precedent for this market, but we do know that discipline is going to be key. Both in the identifying and buying of investments and on the behavioural side of finance. I find the whole psychological side of investing just as, if not more, fascinating than the economics. I have some clients that use me as a sounding board for ideas and suggestions and the portfolio construction is a collaboration. I have some that defer to my expertise, but are keen to learn. And, I have others that want nothing to do with trying to understand markets other than knowing that someone is watching out for them. All of them can work, but having enough self awareness to know and understand your own behavioural tendencies is important.
Talking about my niece reminds me of opening her first investment account a couple of weeks ago. I opened accounts for her and my two nephews at the same time. All had completely different approaches regarding investing. My oldest nephew, Alex, is in his last year of computer science at university and has done a co-op for a gaming company. He has a strong interest, opinion and curiosity about investing in the IT sector and we bounced ideas and options around back and forth before settling on a strategy. Max is a gifted musician with high energy, but with less patience for things outside his interests – he did well to just stay in the room long enough to get the paperwork signed and I would be legitimately surprised if he could remember what we invested in. Victoria asked lots of intelligent questions and showed a hunger to learn and understand my suggestions and the reasoning behind them. I felt pretty good about her seemingly genuine interest and showed my daughter the text I got from her thanking me for what she learned and saying how much she enjoyed talking about investing. Maddie effectively shot down my good mood when she informed me “Dad, that’s just Victoria’s gift, she is really good at making you think she is vested in and cares about your conversation even when she doesn’t. Nobody is really interested in your financial talks!” Having many years practice at tuning Maddie out, I am choosing to believe Victoria’s interest is genuine!
Alex is going to have to learn the discipline to balance out his portfolio with ideas that are outside his main interests to avoid his accounts becoming too speculative and volatile. Max could be an emotional investor; he is either going to have to learn to manage that or find someone he trusts to handle his account and simply not look. Victoria is my favourite kind of investor – open minded, inquisitive, and willing to listen to ideas, take risk and follow advice, but not blindly as she wants to learn. Her test will be when she experiences loss for the first time. Can she learn to see setbacks as opportunities and learn to use them- to refine her philosophy rather than have it discourage her?
You do not need to be a specific personality type to be a successful investor. I fully expect all three of them to flourish, but it is imperative that they learn to discipline their reactions and behaviour over the long term. Picking stocks and building portfolios is really just about guessing. The greater the expertise, the more educated the guess. The longer the time frame, the more rational the decision-making process, the greater the discipline, the more you increase the odds of long-term success.
I am not even going to try and predict where markets are going from here. We have strong momentum and increasing belief that we have hit a bottom in markets and the May jobs report was encouraging. Offsetting that is the pandemic, large scale civil unrest, a nasty looking US election looming, a hopeful but untested re-opening of the economy and rising tensions between China and the rest of the world. I don’t know is going to happen short-term, but I am certain discipline will be key. If the long-term outlook changes, fundamentals breakdown, or management screws up then we sell; if nothing has changed except price, then it becomes an opportunity to buy. Simple in theory, difficult in execution!
Stay safe, stay healthy, stay disciplined!Jeremy
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