Monthly Newsletter - July 2024

seekingalpha08-07

Fear of missing out is a terrible reason to buy anything.In the second quarter of 2024, both the benchmark S&P 500 and TSX indices were up, even as investors remain nervous about the economy and the ...

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JLGutierrez By David Baskin & Ernest Wong  What Would Spock Do? Having been in the business of managing other people’s money for over 40 years, I have seen markets do just about everything you can imagine, and some things that nobody imagined. From the Black Monday crash in 1987 which saw the Dow Jones Industrials lose 23% in a single day, to the lost years of Nasdaq which saw the tech-heavy index lose 80% from its peak in 2000 and then rise exactly zero percent in the next 14 years, to the “Magnificent Seven” driven mega-tech rally of 2024 which saw a chip maker named Nvidia (NVDA, NVDA:CA) rise 1,000% in 20 months, I have lived and managed through the highs and the lows. Certain things I have learned never seem to get old; in fact, they are lessons that keep getting learned and re-learned, not just over the years, but over decades and centuries. Here are a few of these time-tested truths: Fear trumps reason, and there are always things to be afraid of. Look at this list of reasons to sell stocks over just the last 15 years: There have been so many terrifying events over the period, and yet the S&P 500 (SPX) has continued its relentless upward trend. As we have often pointed out to clients, trying to time the market based on the kinds of events shown in this chart is a fool’s errand. Not only do you have to pick the right time to sell, you then have to pick the right time to buy back into the market. Very few can get both those decisions right.  Moving in and out of the market almost always incurs costs, and for Canadians, those costs are now much higher. Paying capital gains taxes on a winning investment now means paying about 37% of the gains realized to the government. That is money that you never get back. It can no longer compound, pay dividends, and increase in value. Volatility in markets is the price we pay for deferring those taxes into the future. It may seem like a steep price some days and weeks, but it is almost always better than cashing out. Fear of missing out is a terrible reason to buy anything. We humans are herd animals and there is a powerful and deeply rooted impulse to follow the crowd. We also are prone to both greed and envy. (As has often been noted, nothing will drive you crazy faster than watching your stupid neighbour getting richer than you.) Envy makes us do foolish things when we see others getting rich; greed makes us ignore rationality when easy money seems to be within our grasp. The combination of these three emotion-driven impulses is the most destructive force imaginable for most investors. Ideally, investment decisions should be made on the basis of sound and thoughtful analysis; emotion should have little to do with how we invest. Sadly, very few investors can act like Mr. Spock of Star Trek fame. We are simply too human, and as he would say, illogical. Don’t just sit there! Do something! Another very human emotion that has also caused untold misery and losses in the market. Market drops spur our “fight or flight” impulse, which was extremely useful when we were hairless apes worried about getting eaten by lions and tigers. It is not helpful when we invest. Fidelity, the giant mutual fund and Exchange Traded Fund (ETF) company, did a 10-year study to find out which of its investors did the best over time. The results were surprising: People who had died, or who had forgotten about their Fidelity funds, outperformed every other group of investors. Doing nothing is often the right thing. Finally: diversify, diversify, diversify. Nothing is more important for protecting your wealth. We have all heard bromides like “Let your winners ride,” or “Water the flowers and pull the weeds.” The problems come up when a few winners dominate a portfolio, and particularly as is the case this year, those few winners come to dominate the entire market. At their peak, the Magnificent Seven technology stocks accounted for 31% of the entire value of the S&P 500 Index. The other 493 or so stocks made up the other 69%. It was a situation that many Canadians will remember from 1999, when Nortel and Bell Canada together made up 44% of the market capitalization of the TSX 300. Every Canadian investor should remember how that turned out, as Nortel went from market colossus to bankrupt over less than a decade. It is also worth recalling that in the eponymous movie, four of the magnificent seven die.  It is an unpleasant fact that stocks go up and down, trends come and go, and markets fluctuate. As the technology gurus say, volatility is not a bug, it is a feature. You can’t have the gains without the losses. The trick is to emphasize analysis, rationality and logic over emotion and fear. Easier said than done, of course, but if it were easy, everyone would do it. Q2 Market Update  In the second quarter of 2024, both the benchmark S&P 500 and TSX indices were up, even as investors remain nervous about the economy and the upcoming Presidential election. The Canadian dollar continues to fall as the Bank of Canada cut interest rates twice, with the prospect of more rate cuts in the fall. Notwithstanding the market jitters about Japan’s stock market and weak employment data in the US, our portfolio companies continued to perform well through the second quarter, though companies’ management teams tended to speak with a more cautious tone about the economy.   Visa (V) (and companies such as McDonald’s (MCD) and Walmart (WMT)) noted weakness in consumer spending among lower-income consumers, a trend that Domino’s (DPZ) is benefiting from as an affordable take-out option. Meanwhile, Live Nation (LYV) is seeing healthy demand for concerts and Ferrari (RACE) reported a record waiting list for its €400,000 supercars. In the logistics sector, both TFI International (TFII) and CN Rail are impacted by weak shipping rates as well as labor uncertainty. In the capital markets, Moody’s (MCO) is seeing a resurgence in volumes as bond issuers took advantage of low spreads and falling rates to refinance debt. TMX Group (OTCPK:TMXXF) is also starting to see a rebound in financing volumes and IPO activity on its exchanges. Similarly, CoStar Group (CSGP) and Floor & Decor (FND) are hopeful that lower interest rates will drive real estate transaction volumes. Mega-cap technology firms including Alphabet (GOOG), Amazon.com (AMZN), and Microsoft (MSFT) continue to generate robust growth, even as they face questions about the return on investment on their substantial capital investments on data centers and chips for artificial intelligence. In the energy sector, Canadian Natural Resources (CNQ) is benefitting from higher Canadian oil prices due to the Trans Mountain pipeline expansion, while Tourmaline Oil (OTCPK:TRMLF)is hopeful that strong power demand and new liquified natural gas (LNG) plants will boost natural gas prices into 2025. Finally, industry consolidators including Constellation Software (OTCPK:CNSWF), Topicus.com (OTCPK:TOITF), Waste Connections (WCN), and FirstService (FSV)are benefitting from reduced competition for acquisitions from private equity firms.  Canadian company earnings in August, especially from large companies such as the banks and retailers, should provide more insight into the state of the Canadian economy. Original Post  Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457538875"}