Panic is Never a Good Investment Strategy and Neither is Greed: A Disciplined Approach Helps Navigate Through Volatile Environments
Headlines are everywhere; Inflation and the requisite rise in interest rates to calm it. Russian aggression in Ukraine. Covid pandemic fallout and the threat of a recession which is very likely. Although we have seen this movie several times before, these headlines can invoke fear of loss in the minds of some clients. However, fear and greed work hand in hand to destroy the financial ambitions of both the unsophisticated and emotional investor. These “investors” overpay for company earnings when markets are overheated and they sell when markets fall and offer greatest value and long-term opportunity.
Price is what you pay and value is what you get! This applies to most items and especially investing. When COVID first hit in March 2020, equity markets fell ~33% and offered a great opportunity to buy fantastic high-quality proven businesses at a discount. We bought many of these on behalf of clients (Alphabet, Sysco Foods, BRP, Timbercreek Financial, etc.) and profited very nicely in the aftermath. By fall 2021, prices had risen to the point that purchasing many growth-oriented firms was just too expensive. Price earnings ratios and other fundamental measurements indicated we would be overpaying for corporate earnings. We looked to private debt and other income investments (Qwest Media, OverBay Secondaries, Private Income, Residential Real Estate etc.) as client account alternatives to overheated sectors in the public equity scene. These offer much higher yields than bonds and GIC’s. With inflation running at ~7.00% and taxation increasing, a government bond, GIC or other low yielding interest paying investment will simply not create wealth. After inflation and tax, your return is negative!
Fast forward to today. The above-mentioned catalysts mean falling equity markets create opportunity once again for the long-term investor. An investor with at least five years and more appropriately a 10-year time horizon should be viewing the present fallout, pullback, correction, crash, rout (pick your headline media word here) as a favourable opportunity to purchase wonderful, proven and high-quality investments at discounted prices. Success in equity markets is not measured quarter to quarter or even year over year. It is measured in years. Compare your household values (taking into account any withdrawals) over the past three, five and ten years: You will see progress.
Crisis = Danger plus Opportunity! To avoid danger, we ensure you have the time horizon to benefit from the eventual recovery and we only buy proven, high-quality companies with proven management and a history of growing earnings. Not a dope stock! Not a Metaverse play! We prefer a Canadian bank, Brookfield Asset Management, McDonalds, Berkshire Hathaway, VISA, Fastenal and so many others like these. Investments like these have outperformed inflation over the long term and offer tax deferral as well. They are true creators of wealth over time, so why not buy them when they are “on sale”?
This brings me to another point. Those owning great American businesses have avoided the ongoing problem of currency devaluation in the Canadian dollar (CAD). If you never ever leave Canada or never buy products online or otherwise from the USA, then you can ignore this. However, to protect against a falling $CAD, it really helps to own great global businesses. This is why we love Berkshire Hathaway. Not only has it averaged a compounded ~20% annual return since 1965, it is priced in USD and is a hedge against a falling Loonie. Same for McDonalds, Visa, Fastenal, or ASML and L’Oreal in Europe. Exposure to foreign companies not only allows you the opportunity of higher returns, and to invest in what you can not find here in Canada, but offers you currency diversification as well.
In a few years, we will all look back and see this downturn for what it truly is. Another opportunity to buy great investments at discount process. This time is not different. As history has proven time and time again, the current broad decline will be followed at some point by a new high. If nothing else, just sit tight and wait for the current downturn to end. In the meantime, we will continue to rebalance client accounts and work behind the scenes to help you manage through this and help you benefit where possible. Seasoned, knowledgeable portfolio managers put their emotions aside and use the situation to better their client’s financial future. None of us have control over the economy or investment markets. However, we do have control over our own actions during tough times and this is key because it is our behavior that determines the outcome. Armed with this, you can help yourself by investing during the downturn and take advantage of other proven strategies, such as leverage or alternative investments to boost your personal non-registered net worth in the future. If interested, give us a call to discuss some methods that may apply to you and to discuss suitability. In the meantime; be greedy when others are fearful.
Written By: Michael Prittie
Source: – Eikon – research platform and Forbes Advisor: