Happy June! Amazing how a little bit of good weather and some easing of COVID restrictions can positively change our mental outlook. Kristy is on countdown for how many school days are left, and it is looking like we will be able to get up to our summer place in Kelowna after all. I went from languishing to optimistic very quickly!
When my daughter had to drop soccer last year because of injury problems, it was pretty hard on me. Not because I had any aspirations of her becoming a professional soccer player, although I did love watching her play, but because I lost an easy touchpoint for us to connect. We spent hours together every week either on the field practicing, commuting to and from games and practices, or later just talking through how things were going with her university team. This time was precious to me, not for soccer reasons (mainly as Maddie has laid down pretty strict boundaries to make sure I limit my “coaching” to just on-field) but because these were easy connecting points for us to talk about life in general. I still have those interactions with my boys as my oldest son, Jacob, helps me coach my youngest son, Jordan’s team, so we are together 8 hours a week or so just for soccer, but it is much harder to pin Maddie down these days. Kristy and Maddie have shopping and spa time where they get mother-daughter time, but I have had to become much more intentional in finding ways to spend time with her (especially since the boyfriend arrived in her life!).
We’ve just recently started hiking with the dog together once a week over COVID. It has been great having that time to dig into some meatier conversations with her once again. My daughter’s conversations typically revolve around relationships and how she connects with people. We talked about how frustrating she has been finding some of her friend groups’ political views during our last hike. They seemed to have very strong, even passionate, opinions on subjects without articulating why. She has friends who don’t want to be vaccinated. We talked at length about the anti-vaccer position, which turned into a discussion on COVID conspiracy theory and other hot-button political topics that are dominating headlines right now. It was a far-ranging discussion! I was pointing out to her that most people will have a gut instinct or reaction to an issue that their upbringing and background have shaped. They often never really take the time to examine whether that instinct is what they believe once the issue or topic on hand is pulled apart and looked at objectively. Fundamentally most people are lazy and will take whatever shortcuts they can to arrive at a destination. This laziness carries over into our thinking.
We tend to shy away from the time and energy required to reason through forming viewpoints and outlooks on complex issues. We want to reduce them to simplistic maxims that fit in boxes we can more easily understand. Whether it is trying to understand the Israeli/Palestinian conflict, issues around COVID restrictions and vaccines, or our response to the Residency School tragedy, it is easier to be dogmatic and have an absolutist right/wrong outlook on issues. Taking the time to understand multiple perspectives on an issue and how someone might have a differing opinion costs energy and work. We want to cut corners, and the willingness to do so is where bias, prejudice, habits, and identity politics have their basis. I encouraged her to take the time to try and appreciate nuance, be adaptable in forming opinions, and not waste her time with zealots. Also, I reminded her that some people are just stupid!
This conversation has direct relevance to what is going on in markets right now. We are going through what markets are calling a “factor” rotation, whereby investors are rotating out of “growth” stocks and into “value” stocks. The thinking is that cheap stocks should outperform, and expensive stocks will lag as inflation ramps up, and the economy reopens. What this has meant in practical application is that there has been a flood of money leaving companies like Amazon and Google and buying airlines and movie theatres instead over this last month. For me, this is lazy thinking. I am not a fan of labels like “growth” or “value.” Fundamentally we want to own good companies at the right price that will grow their earnings substantially over time. It makes no difference to me whether it is called a growth company or value company. Some companies in the growth sector are bad ideas in a hot industry and should be avoided at all costs; some value companies are cheap for an excellent reason. Value and growth are made-up labels that allow investors to cut corners to adequately assessing risk. Companies well-positioned in “themes and dreams” spaces – e-commerce, telehealth, clean energy, did well last year. The beginning of the year brought a welcomed culling of the herd as more speculative names came down to earth as investors realized that some of these companies don’t have actual earnings yet. This was a healthy resetting of the base from which they will grow going forward.
This second quarter has seen some of the more established growth stocks lag the broad-based market, not because they are not making money or because the long-term outlook has changed, but because they look expensive on a year-over-year comparison basis. Last year, Amazon posted billions in revenue; this year, it is still posting billions in revenue, but that revenue hasn’t improved year over year. Last year a company like Cineplex posted millions of dollars in losses; this year, it will have earnings as movies start to reopen. So, what is happening right now is investors are ditching companies whose incomes aren’t going up and flocking to names that are posting huge year-over-year improvements as measured on a percentage basis. This, to me, is investors not taking the time to understand the complexity and nuances of what they are buying. Airlines, cruise lines, movie theatres racked up massive loans just trying to keep the lights on last year. This year, they will post enormous improvement over “0” revenue from the previous year, but the problem comes down to durability.
I want to own companies that can sustain their growth over time, and I have a tough time believing that many of these distressed companies in declining markets will be able to do so. I own a few of them because I like having multiple ideas to balance out a portfolio and believe that some of these businesses aren’t simply cheap but will adapt and grow their earnings this year and into the future. When a company like Amazon has a record year like last year, it invests their billions of dollars in profits back into their infrastructure to increase their competitive advantage in capacity and speed of delivery. I have a hard time believing that a company that needed to be bailed out by subsidies and loans to stay solvent is going to miraculously turn around and be a better long-term bet after standing still for a year. Short term, maybe, but as I have talked about many times, I am not willing to gamble on getting the timing right to jump in and out of a short-term trend.
The Canadian market is red hot right now as commodity prices are surging, and the Canadian dollar jumps against the greenback. We had big inflation numbers this last quarter, but trying to determine what is transitory and down to pinch points in the economy vs. legitimate inflationary pressure is tricky. Will lumber stay at $1600? Industrial plants coming back online, more planes flying, more bins available to ship things, and reduced spending after consumers blow their COVID savings this year are all going to ease these chokepoints at some point. Longer for stronger is the slogan for some; while many economists think inflation likely eases up by the end of the year, but the majority agrees that it is only a matter of time. Do we believe that Canada, with its higher taxes, greater regulation, and reduced productivity, will continue to be a long-term leader in markets? I am skeptical!
I own many Canadian companies and am happy to do so, not because they are Canadian and in a “hot market”, but because they fit my investment selection process as a good company that I want to partner with for the long term. I am happy to own US companies or European companies that would fit the same profile. We want diversification, but diversification within our investment philosophy and discipline. Today, markets get caught up in SPAC speculation, short squeezes, factor rotations, and other get-rich-quick schemes that find traction in today’s media because they appeal to the lazy investor. As a result, we may lag a bit in the short term, but owning good companies in growing sectors is not a trend or fad; it is the cornerstone of a durable portfolio.
Happy to connect with anyone with any questions on markets in general or your portfolios.
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