January Market Commentary- OptimismSubmitted by Mark Smith-Windsor Investment Advisor on April 4th, 2016
There is a story about a father who on Christmas Eve fills his two son’s stockings with different gifts. In the first son’s stocking he placed a fancy gold watch, the second son’s stocking he filled with horse manure. On Christmas morning the first son finds his watch, and with a sad look he says “I won’t be able to wear it because it might break when I play.” The second son runs excitedly towards the father and says “Daddy, Daddy! Santa got me a pony! I just have to find it.”
Whatever life throws at us our outlook matters a lot. The outlook of investors gyrates wildly. Sometimes we think we think we’re about to get a pony, sometimes we despair when things are in fact good, and sometimes we realize we just found a stocking full of horse crap.
In 2015 the S&P/TSX Composite, a broad measure of Canadian shares was down about 9% and so far in 2016 it’s down another 7%. I don’t know anybody who actually enjoys seeing their stock positions being marked down, but it’s important to remember what’s beneath the surface. A share is an ownership interest in a business and the underlying business fundamentals typically move around a lot less than the price of its shares.
If you owned a house and you planned to stay in it for the next 10-15 years, you likely wouldn’t lose too much sleep if your neighbor decided he needed out fast sold his house at a low price. Somehow the stock market is different.
When I was in university I worked at Future Shop selling TV’s and stereos. Boxing Day was the biggest day of the year and I had to be at work by 5AM to get ready. The strange thing was that when I got there, customers already had been lined up for hours. I had the advantage of understanding how our pricing worked. The deals were okay but not great. Basically the stores figured out how to use human psychology to their advantage and are able to incite a buying frenzy.
When a TV goes on sale people line up salivating at the deal, but when someone is selling shares in a business for a significant discount people get really scared. This is because of the complexity involved in evaluating businesses. There are many variables and in a declining market people become concerned that the future value of that business has somehow changed. I suspect that one would be better off using investor psychology to his or her advantage rather than the opposite.
Could the market go lower? Absolutely, the future is always uncertain. I would however remain optimistic about potential opportunities that can come with tough market conditions. Despite the doom and gloom, I am actually quite excited about the future.
Now may be a good time to review your holdings, and potentially add to some holdings at these lower prices.
As a business update, I have been developing a managed account practice. For a managed account we discuss the investment objectives and draw up a plan, but I make decisions on a day-to-day basis and keep you up to date on the activity. There is a management fee charged which is lower than most mutual funds.
I’ve been running a Canadian focused conservative investment mandate for the past three years. Last year we beat the market quite nicely (Which isn’t saying much given what the market did). I have launched a growth mandate for 2016. The difference between the two is that the conservative or balanced mandate has a decent amount of fixed income in it and the growth mandate has almost none. If you have any interest in delegating the day to day decision making on your portfolio one of these investment mandates may be appropriate for you.
As always if you have any questions or concerns regarding your investment portfolio call or email me anytime.