Happy March!
Congratulations to us all as we’ve now just put the two most depressing months of the year behind us! January is officially the worst, but February is at the top of my list for least favourite months. Weather is terrible, the days are still short, and it tends to be my busiest time of the year with the RRSP season. The RRSP deadline is the “Valentine’s Day” of the finance industry. A made-up holiday to drive people to buy investments! I like to think I’ve done a good job all year of encouraging my clients to be proactive about thinking and investing all the time, but the end of every February reminds me that people still need deadlines to encourage action! The only reason February is the second worst month of the year is that it is 3 days shorter than January, which makes it especially concerning that I finished my February sampling from my “whiskey of the month club” before the month’s end!
Maybe it speaks to my lack of imagination, but I am struggling to find things to do over weekends. We went from grappling to find the time to squeeze in any sort of downtime on weekend between trying to play soccer, watching the kids’ games, visiting with friends, and going out to movies, concerts and sporting events as our primary recreational activities pre COVID, to now mostly hiking and games nights. Family games nights started off as being lots of fun and a great way to connect with the kids, but as the novelty has worn off, I remember why it was never a family staple to begin with for me. I prefer active or completely sedentary – that sort of in between the two grates on me as I find I can’t fully relax and am not really fully engaged. I now find myself sitting around the table as my butt goes numb from being immobile too long wondering at different ways I can wind the kids up rather than paying attention to whatever game of the week is on the agenda. I am also pretty tired of walking up mountains only to turn around at the top and just walk back down again. COVID fatigue is a real thing!
This year it didn’t help that markets pulled back in the last couple of weeks of the month with the broader markets dropping 5% off of their highs. The top two questions that keep coming up in client meetings revolve around markets potentially crashing again and Bitcoin. Carissa has finally convinced me to join the 21st century and my website has been updated enough to the point that you should at least be able to recognize me again in the profile pictures. Also going to try adding in some alternative video/blog posts in there as additional educational tools for clients. With the emergence of markets and investments into more mainstream social media I am getting a lot more questions on trending market topics. Will try experimenting with monthly video shorts as a sort of teaching aide for those that are interested. First one is going to be me expounding a bit on Bitcoin. Carissa tells me I need to put in teasers to drive traffic to the new website – not sure if Bitcoin is really that exciting or exactly why I need to drive traffic there, but this is me trying to keep her happy! For those that don’t want to watch me on video the really short answer on Bitcoin is that it is not going to stay where it is. Going to be a story of massive gains or crushing losses and should be very firmly planted in the speculative part of any portfolio. If you had some money saved from not being able to get to a casino, then bitcoin might be worth considering for a gamble, but it is not where you want to be putting retirement funds. Will send out email with link to video on it once we have everything up and running. If that doesn’t drive enough interest, I will be joining Tik-tok next.
Stocks hitting record highs is a legitimate cause for concerns surrounding valuations. There are a few bubbles that have crept into markets and average P/Es (price to earnings ratio – a traditional metric used for valuing stocks) are on the high side. This is a bit misleading though as markets are being skewed a bit both by frothy valuations in a couple of the bubble sectors, and really low earnings in the COVID crushed sectors. Clean Energy is definitely in a bubble. Can’t really wrap my head around Tesla valuations and any smart tech in green energy has exploded. It reminds me a lot of the IT bubble back in the late nineties. The narrative driving the growth is powerful and widely bought into. In the late nineties, technology advancements, Moore’s law and the potential of ecommerce were equally compelling, but not every company that added dot.com to its name was a good idea! Clean energy has the same vibes. Huge political will power to move away from traditional fuels, reduce our carbon imprint and commit massive investments in “green” mean that there is no question clean energy is going to be a main driver of our economy for the next decade at least. But not every company in that space is going to make it. We are not even sure which subsector – solar, wind, hydrogen, geo-thermal etc. is going to survive the test of time, never mind trying to identify which of the myriad of companies competing within these spaces will “win”. There is going to be a “culling of the herd” here at some point, similar to the tech bubble bursting. I don’t recommend avoiding the sector altogether though as trying to time going in and out of these bubbles is really, really hard. Technically, Vancouver real estate is in a pretty big bubble too, but I wouldn’t recommend selling your home, renting and then trying to buy back in later! Too hard to be right twice with timing something like that. At some point, naysayers will be right, but that may be years away. And even if it is not, what emerged from the Tech rubble collapse was stocks like Amazon, Apple, Google and the investors that stayed in the IT sector in general have been well rewarded for their patience! The days of just piling into market leaders and expecting great returns are ending. Really important to be selective in how we participate in these sectors and disciplined in how much exposure we have, but it would be a mistake to ignore long term secular mega trends all together.
On the opposite side of the scale, stocks like Air Canada or Cineplex also are highly priced when you use P/E as your benchmark as these companies have no earnings at all right now due to COVID. Since we know that this is not going to be the case in 6 months or so, markets have guessed at what their earnings will be next quarter assuming the economy reopens and factored that into current pricing. These kinds of stocks are driving broader market valuations up and contributing to the narrative of an overpriced market. Ray Dalio, co-chief investment officer of the world’s biggest hedge fund, Bridgewater, posted last week that around 5% of the top 1,000 U.S. firms were in bubble territory. Bubbles are out there for sure, but it is not the widespread phenomenon you may think it is given current news and reporting and it is well off dot.com boom levels.
It is also important to differentiate between some of these software companies and clean energy stocks and IT giants like Amazon, Google, Apple. No real barriers to entry for the software business or starting a clean energy company but trying to replicate Amazon’s business model is really, really hard. First of all they legitimately made billions of dollars last year as E-commerce jumped from 16% to 22% during the pandemic and they picked up more than their fair share of that business. Second, although they are making investments in areas they are expecting to change over the next decade, they are also making massive investments in improving the things that will not change. Amazon acquired approximately 125 million square feet of warehouse space this last year alone – that’s roughly equivalent to 3/4s of all of Walmart’s existing distribution network (and that took them 50 years to build out!). Amazon has orders in for 100,000 electric cars from the private (Amazon backed) EV company, Rivian. Once filled, that will give them an electric delivery fleet bigger than UPS’ entire fleet and closing in on FedEx. They invested $4.5 Billion dollars (all of Targets profit for the year) into just improving their vertical integration so that they can improve their delivery windows from days down to hours. That is a durable, scalable business with a wide moat that can’t be lumped into the same category as wannabe software companies that have ideas and plans rather than real earnings and infrastructure. Amazon, Apple, Google all trade at P/E ratios roughly 30% higher than the broad-based market. This is the historically “normal” premium that you would pay for these companies. Amazon has over a decade of history to prove they are worth that premium as they are consistently growing their earnings 30% faster than a company like TD Bank.
None of this is to say that we can’t go through another market correction. There is no such thing as “upside volatility”. Whatever goes up, always has the capacity to drop again and markets are really only predictable in their unpredictability. I am always afraid of what we don’t see coming. Markets are going to periodically correct and shake out some of the excess and the truly unexpected can cause legit crashes, but being afraid of the unknown is not going to get you ahead when investing. What we can see right now is a period of expansionary economic growth as massive fiscal and monetary stimulus works through the economy. Market dips should be seen as opportunities to add in quality companies. There is a record amount of money in consumer bank accounts from accrued COVID savings. People have saved a lot of money over this last year as vacations were postponed, driving was reduced, and bar and entertainment spending was replaced with board game purchases. Mix more spending power with this massive amount of pent-up demand for people to get out and do stuff again as the economy opens up and you can readily understand why markets are expected to keep expanding!
It is always important to be rational when investing, but it can be especially difficult in a hot market not to let emotions creep into our decision making. Worry, greed, FOMO all play into what we think we need to be doing in reaction to market movement. Having a proper plan and investment philosophy is key to keeping our cool and investing with discipline into ideas and companies with durability. This will allow us to see through the short-term market headlines (as interesting as Bitcoin and GameStop might be!) and keep us on the road to long term prosperity!
Stay positive, stay safe, stay disciplined!
Jeremy
The information provided here is general in nature and should not be considered personal investment advice or solicitation to buy or sell any securities. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances.
Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.
leave a comment