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Missing the obvious

My first house was at the bottom of a hill in Prince George. While there may be many houses at the bottom of hills in Prince George, mine was situated so that when the snow melted in the spring, all the water from that melt found its way into my back yard, and from there to the window wells in the basement. 

Who knew that could happen in the middle of July? Like my father, after his first visit in the winter without any knowledge of the flood waters to come, you’re probably asking yourself, “Why did he buy a house at the bottom of a hill?” In hindsight, it is an obvious obvious concern, but at the time it was the last thing I was thinking about.

The house was well built, the neighbours were not only really good people but they also kept their yards and houses immaculate. It was close to schools, yet away from the main flow of traffic. The double garage had 16’ ceilings. It was very quiet at night. It was well-priced and, with a little tune up in the basement, a new deck in the back yard, a little turf, and a cedar fence, it seemed perfect. For $160,000 it was a heck of a deal. 

Buying stock can be like buying a house in a lot of ways. It’s not just the obvious things that make a company a good place to invest your money, it’s the things you don’t think about asking in your excitement to own the next-great-idea. It’s the questions you didn’t ask that can cost you money in the end. Sometimes we don’t think about it, other times we just don’t want to. 

Take cannabis stocks as an example. There are several small cap growers who have licenses in Canada today and also trade publicly. They weren’t always growers of medicinal marijuana. In fact, one of them, not too long ago, was a mining company. No profits, no problem, it’s the wave of the future. That isn’t to say they may not be successful ventures at some point, it’s just that one needs to ask the questions before you put your money in. 

As the Liberal government swept into power in October, one of the campaign promises of Justin Trudeau was to review current marijuana laws, with an eye toward legalizing it, or at the very least, decriminalizing it. The stocks started to rise after those comments in the summer, and once the Liberals were elected, prices went up dramatically. As quickly as they rose, they soon reversed course and gave back a lot of their gains. 

Why? I’m not entirely sure, but what I do know is that the Liberal government has more pressing things on their plate right now than the legalization of marijuana for personal use. The ‘market’, while illegitimately established in a lot of cases, isn’t poised for explosive growth just because it suddenly becomes legal. Like all major changes, it usually takes a long time. 

So, what am I trying to say here? Certainly not proffering an opinion on whether you should invest in legal marijuana growers or not. It’s more that when you invest your money in something, you should ask the obvious questions as well as the not so obvious ones. 

Is the market for whatever they create growing, declining or stagnant? 

Does the legal and environmental structure in place allow for expansion in a reasonable period of time? 

Is there potential to expand their market or increase their sales? 

Are the recent price increases a result of solid facts or more hope and prayer supported by speculation?

Whatever the case, if you’re thinking about buying a house at the bottom of a hill: Shovel work and 100 feet of big-o and piles of river rock can go a long way to fixing your problems. The best route, though, is generally to stand back and make sure you’re not missing the obvious, that you haven’t forgotten to consider the facts that turn a seemingly great idea into nothing but an expensive lesson.


Myth investing

Rallies and Reversals

Myths have been a part of life as long as we’ve been able to communicate. From campfire tales to sage words of advice, myths have been used over the years to teach, to share, and sometimes to create healthy fear. 

Most of the time, we adults understand that behind the stories lies a nugget of wisdom and experience. There are times though, when we forget the true intent, and take the words literally. 

Investment myths are often accepted as truth, but in reality are simply ways of creating a sense of predictability in an otherwise unpredictable world. Just as a broken watch is always right twice a day, so too are investment maxims right sometimes.

The Summer Rally

Investors and traders start talking in May about the summer rally as though it is a specific set of dates. Typically a summer rally will last about three weeks, and falls between June and August. While this may be true, what’s difficult to predict is the three weeks when it will happen. And, to the credit of the other three seasons, there is generally a three-week rally in any of those other periods as well.

Sell in May and Go Away

This myth originated from a period of seasonal strength that was typically seen in the base metal sector. Base metal prices, as well as their equity counterparts, would peak in May and then decline through to September. 

This was actually a result of lowered demand by the European base metal smelters as they took operating shutdowns for Europe’s extended holiday season. While still reflected in prices, the pattern has been muted as smelter capacity has decreased in Europe and grown in the Far East and South America. Along the way, the financial media adopted the phrase and used it to to project the pattern onto the broader markets. Unfortunately, the historical data does not support the trend.

October is the Most Dangerous Month of the Year for Investors

This myth is based on the fact that we’ve experienced two of the most dramatic market downturns in history in October. The years 1929 and 1987 will forever be in the collective memory banks of traders. The problem is, the S&P has risen in five of the past 10 years in October and the TSX seven of the last 10. In reality, October is more often a seasonal bottom, and a good time to be buying.

The Santa Claus Rally

Near and dear to our hearts, is the Santa Claus rally. Whether it’s because we get that boost to our portfolios at the end of the year or just because good things should happen at Christmas, we like to believe that the trading days between Christmas and New Years will result in a rally. Traders will often start buying after December 15th and carry on through the early days of January, if markets are good. While not always true, more often than not, December is a bullish month, the last week in particular. This leads us to what is known as the January effect, or as the traders often say, ‘as January goes, so goes the year’.

So if you’re tired of all the research, the hours of technical analysis, and the pile of income statements and balance sheets in front of you, and you just can’t make the call, maybe its time to chuck the common sense approach and take a flyer on a myth or two. Not.

Lone wolf, or pack?

The investment industry is a continually evolving entity.

In days gone by, most investment advisors worked on their own with the support of an associate. As client needs, markets, and demographics changed, so did investors’ expectations. The main function of a stockbroker was to facilitate the buying and selling of shares in portfolios. With the introduction of mutual funds, the security management became simplified, so individual advisors began to offer an expanded suite of services. This included financial planning and basic estate planning.

With these expanded service offerings, the ability of advisors to offer additional products and enhanced planning strategies had arrived. For the investment industry, the main thrust was insurance products. This enabled investment advisors to act as financial planners, offering their clients investment management, risk management and wealth management expertise.

In the industry today there are a multiple of offerings available, but at their core are only two different approaches: The lone wolf -or jack-of-all-trades - and the team offering. 

Running a single operator business, an advisor is required to maintain a level of expertise in a number of different areas (investment markets, financial and estate planning, lifestyle planning and insurance) and to provide the full slate of services to each of their clients. While this provides a level of intimacy with each client, it also limits either the number of clients that an advisor can comfortably manage, or constrains the depth of services that an individual can provide. 

The decision to work with a team comes with a different set of advantages and compromises. In the team environment, different advisors are able to gain a depth of knowledge on separate disciplines that could be difficult for individual advisors to achieve on their own. The ability to specialize enables a team to match up each team member’s individual strengths with different areas. 

So, the question then becomes, what is best for you as an investor? If your needs are less complex and the level of planning required is fairly straightforward, then an individual advisor with a reasonable client base may be the answer. If your investment portfolio involves multiple accounts, diverse investment strategies, a small business, blended family structures, complex estate planning needs, or a desire to be completely hands-off and turn over the responsibility to someone else, a team may be the best solution.

As client needs have evolved, so has compliance and oversight. The demands for increased disclosure and due diligence, now expected by regulators, adds a whole new level of responsibility to advisors’ job descriptions. From meticulous note-taking and enhanced reporting requirements, to the disclosure of embedded trading costs and fees prior to transactions being made, the role of the advisor is changing. The commodity most challenged in this environment is time. Advisors need to spend more time speaking with their clients, offer a greater breadth of advice and service, and still provide the competitive investment returns that are now simply ‘part of the package’.

For investors, these are all positive developments. For advisors, depending on your structure, it can either be a challenge or an opportunity to shine.

Questions or comments? [email protected]


The right decision

Most people believe they make objective well-reasoned decisions. But do they?

A study done a few years back asked American drivers about their driving abilities, and 64% rated themselves excellent or very good drivers. At the same time, they felt only 29% of their close friends, and 22% of people their own age, had driving abilities that they considered excellent or very good. 

Objectivity has never been our strong suit. We tend to believe what we think is good for us, and disbelieve that which isn’t.

Being invested in the markets is no different. Most investors’ reactions are predicated on one of two emotions: Fear and greed. This has been said so often that it has become a cliché, but a true one. Warren Buffett put it best, “Be fearful when others are greedy, and greedy when others are fearful.”

So what does that mean for most investors? Unfortunately, it means that decision-making is often dictated by emotions, and, therefore, are made without the benefit of a logical process . . . or any process at all.

When markets plummet, we fear for the loss of our capital, so our first reaction is to cut and run. When our statements are positive and markets are moving higher, we want to jump in with both feet, borrow to buy, and often load up on a single security – all decisions made with the benefit of greed. Both actions are usually very expensive decisions for an investor.

So what is the secret? 

There isn’t one, just a few common sense steps to turn investment decisions into repeatable processes that will prevent you from making ‘from the gut’ decisions.

Have a plan
Know what you are trying to accomplish

Understand your risk tolerance
There is the ‘most effective way’ to be invested, and then there is the best way for your temperament. Choose the best approach for you.

Create targets
Know when you will take profits and know when you will move part of your investments to cash. Try not to deviate, stick to your own rules.

Be in the market for the long run
If you have shorter term needs for the funds, don’t put them in the market. Find a safe place that will deliver the assets when you need them.

Dollar cost averaging works
It’s a rare day we get the timing perfect.

There are no magic bullets, just good asset allocation, quality investments and patience.

Don’t believe your emotions
Always go back to your processes and your disciplines.

The markets are unpredictable, volatile, and rarely do what we expect from day to day. That doesn’t mean we should avoid them, but we must consider how we should best approach them. 

In the words of Ralph Waldo Emerson, “The wise man in the storm prays to God not for safety from danger but for deliverance from fear.”

Questions or comments? [email protected]

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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.

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