Canadian Capitalist

34 responses so far ↓

• 1 RobG // Jul 15, 2008 at 9:41 pm

  Thanks for this post… you need these reminders sometimes! If you don’t have a long enough horizon to live through a bear market, you shouldn’t be heavily invested in equities.

• 2 Steve Heath // Jul 15, 2008 at 10:03 pm

  As CC knows, I just started investing at the beginning of this year, after learning everything I could about it, then planning my portfolio and asset allocation…. just in time for everything to drop 10%.

  I can’t figure out if it’s a coincidence that will work out in the long run for me, or if it’s another manifestation of my uncanny ability to cause it to rain by washing my car. If it turns out to be the latter, I’ll make sure and tell you guys when I give up and cash out so you’ll know when to jump in for the next bull market

  (By the way, in case it is, sorry about the big drop today… I bought again this morning

• 3 Dave // Jul 15, 2008 at 10:13 pm

  “While a bear market is painful to experience, there is a silver lining for long-term investors — lower stock prices today means higher expected returns from equities in the future.”

  So true. One can only imagine the pitiful returns one would obtain if one ONLY purchased stocks during bull markets. Sadly, this is what most people do!

  I can empathize with Steve. We recently increased the amount we are putting in to our RRSPs, before markets really started to tank but hopefully the fact that we are putting in more will also help us out now that markets have fallen a bit.

• 4 Canadian Capitalist // Jul 15, 2008 at 10:29 pm

  Steve: Short-term stock price movements are impossible to predict (despite what the talking heads tell on TV). This year markets are in a downward trend that buyers feel bummed but in a rising market the same buyers will feel like a genius.

  I figure if we did the basics right — invest regularly, diversify, keep costs low, don’t chase performance — we’ll do okay in the long run. But it is almost certain that we’ll encounter unpleasant stretches like now.

• 5 Phil S // Jul 15, 2008 at 11:40 pm

  CC,

  It depends upon what you mean by “short term”. If you are referring to stock movements on a daily basis, then I agree.

  However, I have been looking at the macro-economic conditions in the USA and they have been looking bad for a very long time. I had been more surprised about how resilient their market has been in the face of record deficit spending, an obvious housing bubble, outsourcing of jobs to china and india, tightened credit markets, etc. A perfect storm has been developing, economically speaking. I expected the wheels to come off the wagon last year, but I was a year too early. And Canadians somehow think that we are immune despite the fact that 85% of our exports go to the USA and history has always said that when the US economy sneezes, the Canadian economy catches a cold.

  For me, I have paid back all of my leverage so I’m currently 0% levered, plus all of my new cash for the past 4 months have been getting dumped into an ING investment savings account. I agree with the rest of you, that it is very painful to watch all of the stock holdings I have which I didn’t sell get absolutely obliterated right now… But I also know that I have a LOT of “dry powder” as the expression goes and I can pour back into the market when I think the economic conditions can’t get any worse.

  I don’t think I’ve ever seen a run on a Canadian or US bank in my entire working life - but I’m fairly young. Indymac’s complete collapse is astounding and unbelievable to watch for someone like me. I have heard that there will likely be 2 or 3 more major US banks that are on the verge of collapse.

  Our Canadian banks keep insisting that they have no sub-prime exposure, but they always say that to calm the fears of customers and investors. A co-worker today pointed out that Canada 3000 and Jetsgo’s CEOs were saying they were in great shape the very day before they collapsed. The same as Enron, Nortel, Bre-X, etc. Well, OK, Nortel didn’t collapse completely, but Frank Dunn kept pumping up the stock while all the time selling his holdings, days before it plummeted to bottom out at $ 0.75. And keep in mind that ScotiaBank kept saying that their banks were perfectly solvent before they secretly pulled all of their Canadian employees out of Argentina before their banking operations there completely collapsed.

• 6 Al // Jul 16, 2008 at 8:16 am

  Here’s how I look at a bear market. The amount of money I currrently have invested is MUCH lower than the amount of money I will be investing in the future, so lower prices help me more than high ones. As long as things are up 20-30 years from now, I’m a happy camper.

  PS. It does bug me a bit that I could have bought the same stuff for less by waiting. But I don’t have a crystal ball.

• 7 telly // Jul 16, 2008 at 9:13 am

  Great post CC! Most of us can always use the reminder. Bernstein (Four Pillars) was the 1st to teach me this important bit of information and it’s the only reason to really appreciate that I’m not YET retired. What a tough go that would be!

  Unfortunately, this is a really expensive summer for us (many out of town weddings) so the extra money that would normally go to investments is going to go to family and friends and plane tickets! Also, my employer just sent out an email informing us that 401k matching is going to be temporarily postponed (although the 4% pension will still be paid). I guess they don’t realize that a bear market is a good time to invest.

• 8 NN // Jul 16, 2008 at 9:35 am

  Phil S, be carefull - there are teams of people that are trying to figure out ways of timing the market, and they are turning out to be no more profitable than a coin flip. Remember that the media will only publish and quote those that had forecasted (guessed?) correctly, many more failed. You said it yourself - you thought this would have happened last year already - it seems the cliche is true: if you have to forecast, forecast often. In any event, seems that this time it will work out for you - hope you don’t sit on your cash too long, and happy hunting for those quality stocks.

• 9 ConnieB // Jul 16, 2008 at 10:31 am

  This si a beautiful post, and very very true. While it is painful to see how some of my stocks have plummeted, I am using this time to buy shares in companies that I believe are undervalued right now. In the next 5 - 10 years, I expect to see a nice profit.

  It’s hard for some people to be patient that long I think, but I knew that was what I would have to do going in.

  I love seeing this point of view, thank you for the article. I think more people should be standing up and cheering Now is the time to invest!

• 10 ThickenMyWallet // Jul 16, 2008 at 10:34 am

  The p/e ratios are coming back down to historical valuations. Over the last 50 year, the S &P 500 p/e was in the range of 12-15 so this isn’t a crash per se but a return to the historical mean. Buffet was also quoted as saying that stocks have been over-priced for some time now.

  The same thing is happening in real estate- its not that real estate isn’t an attractive investment, just don’t expect 20% returns- that is not what history tells us.

  Having said that, I am waiting out the panic of the mobs for a bit.

• 11 Richard // Jul 16, 2008 at 10:39 am

  I’m really not happy about the current situation - not because the market is going down, but because I have a lot to save up for in the short term and need to make sure my cashflow is ok while I change things up so I don’t have a lot of extra money to invest!

  I did start a small preauthorized purchase plan this month so if markets around the world can keep going down for the next 15 days it will ease the pain a little (Steve?).

• 12 Canadian Capitalist // Jul 16, 2008 at 10:48 am

  Phil: While I agree with your points that the US economy seems to be in trouble, I’m have no idea whether the troubles are already baked into stock prices or not. Maybe they are, which would make an investor bullish. Maybe they are not, which would make an investor bearish. All I know is that valuations today don’t look too bad. That’s a good reason for sticking with equities and maybe even buying some more.

  I agree with you that stock pickers should be careful but I’ve kicked that habit (at least for US stocks).

  Al: Well said. It’s a hard mindset to develop though. If it makes you feel any better, I bought some more VTI and VEA last fall and wish I had waited!

  telly: The worst thing to do in a bear market is selling equities. Buying may turn out be a bonus but the most important thing is staying the course (as Bogle would say). I know the feeling of wanting to buy but running out of cash. Unfortunate, but c’est la vie, I suppose.

  NN: Good point. A good example is Jeff Rubin. When oil hit $100, the Post put him on the front page praising him as a pundit who made a bold call. Fair enough. But Mr. Rubin makes routine predictions such as target prices for the TSX Composite. He set an initial target for 2008 in December 2007 only to revise it sharply down just three weeks later. So, much for a seer, eh? Predictions are mostly a crap shoot.

  I think what Phil tries to do is accumulate cash and look for attractive entry points but holds on to existing positions. That does make sense when equities are trading at high valuations but I think today’s valuations are reasonable. I suppose that’s what makes a market — all our differing opinions on whether expected returns are “attractive”.

• 13 nobleea // Jul 16, 2008 at 12:00 pm

  Why are stocks treated so differently? If you were in the market to buy a house or a car and the price dropped 50%, you’d likely jump all over that deal. But if stocks drop 50%? Yikes, sell and move to cash!

• 14 telly // Jul 16, 2008 at 12:17 pm

  noob, I don’t know, I think people aren’t much different when buying homes. More people are buying homes today in Canada then ever before yet many would say the valuations are very high (compare price / rent). And more and more people in the US are terrified to buy homes today because they’re afraid prices still have a long way to go (down) still.

  It’s a behavioural thing. And and big reason why bubbles form…

• 15 telly // Jul 16, 2008 at 12:18 pm

  sorry…I meant “nob”!

• 16 Aleks // Jul 16, 2008 at 1:25 pm

  People tend to extrapolate short-term movement rather than the long-term trend. If prices are going up, they will continue to go up rather than revert to the mean. I think fundamentally most people just have a hard time with non-linear trends. Their house was worth $300,000 two years ago and is worth $400,000 today, therefor they think two years from now it will be worth $550,000 rather than $335,000.

• 17 Rita // Jul 16, 2008 at 3:27 pm

  Jason Zweig has tons of a really interesting as well as useful material in his website’s Articles & Advice section. It’s especially handy for those of us who has no patience to wait for his yet-to-come posts in a Wall Street Journal.

  http://www.jasonzweig.com/articles_results.php?section=2

• 18 moneygardener // Jul 16, 2008 at 3:30 pm

  Good post CC. A timely reminder.

• 19 Daily Buy-Sell Adviser // Jul 16, 2008 at 4:23 pm

  The trouble with a bear market is that it doesn’t actually do a lot of good to look ahead, at least not in the sense of counting the days. In today’s markets, so many things are unresolved — chiefly the bad credit choking the financial system — that it’s almost impossible to predict when the market will straighten up. Even the shortest bear markets tend to last for months at a time.

  Having said that, it really is a good time to shop for bargains. You can buy good stocks at a discount in the almost certain knowledge that they will be going back up. As long as you’re willing to wait and don’t get discouraged too soon, it’s an investment strategy that has proven its worth.

• 20 Canadian Capitalist // Jul 16, 2008 at 6:12 pm

  Aleks: In “Your Money & Your Brain” Jason Zweig points out how we are wired to extrapolate from sample sets as small as 2 or 3. We can’t help it… we are built that way!

  Rita: I’ll include the website in my links page. I do refer to it regularly.

  DBSA: Are you affiliated with the folks who publish “The Investment Reporter”? Good point that it is a good time to shop for bargains, or at the very least making a shopping list.

• 21 Phil S // Jul 16, 2008 at 8:45 pm

  I hear a lot of words like “bargains” or “reasonably priced” here on this subject… But stocks are currently at bargain prices as compared to what? Trailing 52-week earnings? Isn’t that kind of like driving down the road while only looking in the rear view mirror? If we’re heading into a recession, which I think we are, then the Earnings part of the P/E ratio is most assuredly heading down south for many stocks. What happens if the company stops making a profit, such as GM or Ford? Is that suddenly now the biggest bargain of them all? I know I’m being facetious here, but my point is that you can’t price everything based upon trailing earnings…

• 22 Canadian Capitalist // Jul 16, 2008 at 10:12 pm

  Phil: Your point is very valid for individual stocks, but for the market as a whole the trailing p/e ratio compared to current 10-year bond yields is a good starting point for valuation. Of course, earnings could fall but assuming S&P 500 earnings will stay flat for 10-years is an extremely conservative assumption. By that measure, S&P 500 is reasonably priced. I’d be curious to hear why you think the market hasn’t sufficiently discounted the troubles in the US economy.

• 23 Average Joe // Jul 16, 2008 at 11:28 pm

  Usually, the bottom of the market is reached when the average investor throws in the towel and “grown men are weeping in the street”. And of course, the little guy misses the ride up.

  As I see everybody talking about bargains and what a great opportunity this is, it makes me think there is a lot more pain coming.

  Not that I necessarily disagree, but there just seems to be too much optimism. That can’t signal the end of the bear.

• 24 Canadian Capitalist // Jul 17, 2008 at 7:07 am

  Joe: Good point. My own “front page indicator” (when a market tumble is reported on the front pages of major newspapers) hasn’t occurred yet (it did in the market correction of Jan ‘08 and March ‘08). So maybe we have a while to go yet. Then again with VIX crossing 30, many observers say we are in a panic state already. Wish I knew who is right!

• 25 telly // Jul 17, 2008 at 7:42 am

  Joe makes a really good point and though I may agree with him, I’ll keep doing what I’m doing…stay the course with DCA. Within the next 3 months, 6 months, a year, 3 years, however long this bear lasts, I’ll have averaged down and in 20-30 years when I retire, it won’t matter much if I managed to pick the darkest day as long as those days don’t reappear early in retirement.

• 26 Daily Buy-Sell Adviser // Jul 17, 2008 at 9:59 am

  Yes, we part of the same company that publishes The Investment Reporter and Investor’s Digest of Canada, among others. Buying good stocks at discount prices during a downturn has been a steady refrain in The Investment Reporter’s philosophy for many years.

  And in reply to Phil S., this approach is indeed not to be taken lightly. The goal is to identify stocks that are down through no real fault of their own. If the company continues to run its business profitably, and has the ability to retain and increase its market share in a recovering economy, then it’s still a good buy. Above all, we look at the depth of a company’s assets — could it survive a long, deep recession?

  Companies like Ford or GM or many big financial firms are in industries that are currently infected with serious flaws, so why take chances? By all means, consider earnings and P/E ratios, but look at cash flow and debt as well. It sounds like an old record, but it still plays well: it’s all about the fundamentals, especially at times like these.

• 27 larry macdonald // Jul 17, 2008 at 8:40 pm

  Warren Buffett said during the severe correction of 1973-74 that he felt like an oversexed guy in a brothel.

• 28 Phil S // Jul 17, 2008 at 10:26 pm

  CC. On BNN, so-called market “experts” have been forecasting a very short, shallow US recession. So, if you’re an “efficient market” believer, which you seem to be, then basically it appears as though they’ve priced in a short-term V-shaped recession.

  In my opinion, the US economy is in a “perfect storm”. Their government is still spending money like a drunken sailor to finance the ongoing war in Iraq, and they were talking about invading Iran. The credit crunch is in full force, so no matter how low the Fed drops interest rates, there aren’t many banks solvent enough to lend more money. There was a run on Indymac because their asset value is negative and from what I understand, there are more US banks with negative asset values. People are getting laid off left and right and many of them shouldn’t have been homeowners to begin with and foreclosure rates are at all time highs. People who have stable, well-paying jobs are seeing their homes decline by 30% +. Consumer confidence, the engine of the US economy is falling like a stone. Airlines are drastically cutting back on flights, the IPO and M&A markets are nearly non-existent… Do I need to go on?

  As for Canada, we are turning into a one-trick pony with Alberta carrying the entire country’s economy. All commodities eventually correct, and if and when oil, natural gas and base metals correct, then LOOK OUT BELOW! Canada will experience the worst economic recession EVER because we won’t even have manufacturing exports to fall back on… OK, we have RIM, but can the maker of the Blackberry employ 25 million people?

  Sorry, that was a very long answer to a very short question. But that is my general or “overall” feeling. Still, with that said, I took a small nibble at H&R REIT today in my RSP account… Haha! =0)

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• 31 Thomas // Jul 21, 2008 at 3:54 pm

  I currently have about 1,800 in XIU with Etrade.

  Is there a balance ETF you’d recommend? I see Claymore has a couple but I’m open to suggestions, bearing in mind that I’m at the $19.99 a trade level.

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