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History says, the best performance comes after the worst
Over the last 52 years, the worst 12 month period for Canadian stocks was from June 1982 to June 1983. We were in a full recession, and the market dropped 39.1% in that period. I can assure you that it felt as though the sky was falling at that time - much as it feels that way today. As we speak, the Toronto stock index is down about 30% year to date (although our portfolios are certainly down less than that).
What is interesting is that the very best 12 month period for Canadian stocks was from June 1983 to June 1984. The Toronto stock index climbed 86.9%. To borrow from Joe Biden "let me say that one more time". The very best 12 month period for Toronto stocks over a 52 year period, covering over 600 different rolling 12 month periods, came immediately after the worst 12 month period.
There are no guarantees that this will happen again, but there are certainly some strong reasons to suggest it could happen.
The most basic reason is the following:
- You can buy Bank of Montreal shares today and receive an annual dividend of over 7% (in a non-registered account this dividend will be tax preferred over interest income). As an added bonus, Bank of Montreal shares are currently trading at their cheapest price to earnings levels of the past 40 years.
- You can buy a 1 year GIC at Bank of Montreal today and receive a rate of 2.25%. This rate will be going lower after today.
At a certain point, more people will start to prefer the 7% dividend and cheap historical shares to the 2% returns on cash and GICs. We may not be there today, but it will come very soon.
The more complicated reason is that World governments are starting to work together to take the fear out of the markets. They are doing this through massive loans to banks and businesses at very low rates, and through today's announcement of a coordinated round of global official rate cuts, lowering the prime lending rates by ?% in the US, Canada, European Union and England among others. (if you have any debt tied to the prime rate, you just lowered your expenses today by $500 annually for every $100,000 in debt).
There is finally a global commitment from governments to do whatever it takes to end the crisis. Sometimes it takes a few extra days or even weeks for the panic to subside, but when people realize what these commitments truly mean, it will provide the basis for panic selling to slow and ultimately end.
US MARKET REACTION TO CRISES:
| APPRECIATION |
1 year later |
2 years later |
| 1948-49 Berlin Blockade |
-3.30% |
13.20% |
| 1950-53 Korean war |
28.80% |
39.30% |
| 1962 stock market break |
32.30% |
55.10% |
| October 1962 Cuban Missile Crisis |
33.80% |
57.30% |
| Nov 1963 Kennedy assassination |
25.00% |
33.00% |
| Aug 1964 Gulf of Tonkin |
7.20% |
3.10% |
| 1969-70 Stock market break |
43.60% |
53.90% |
| 1973-74 Stock market break |
42.20% |
66.50% |
| 1979-80 Oil crisis |
27.90% |
5.90% |
| 1987 stock market crash |
22.90% |
54.30% |
| 1990 Persian Gulf War |
23.60% |
31.30% |
| Sept 11, 2001 U.S. Terrorist attack |
-3.80% |
6.00% |
| Mar 31, 2003 Iraq invasion |
29.60% |
31.40% |
| Average appreciation |
23.70% |
33.4 |
Source: Contrarian investment strategies. David Dreman
WHAT HAVE WE BEEN DOING TO DATE AND WHAT WILL WE DO TO TAKE ADVANTAGE
We wanted to share with you some of the specific investment strategies deployed through our investment manager at Campbell & Lee to ensure your hard earned savings are being well managed to grow over time and more importantly able to weather the storms that strike every decade or so with unpredictable ferocity. This is a very painful selloff and we do not underestimate the anxiety it is causing.
Our defensive strategies include:
- Correctly identifying excessive US (and European) market risk and overvaluation a few years ago, which resulted in the decision to exit these markets. Since then we have maintained less than 5% combined exposure to these markets.
- In 2006 we predicted the overvalued US dollar would significantly erode value for Canadian investors and concentrated investments in Canada. This strategy has benefited our clients ever since.
- We recently increased our relative gold weightings as a specific hedge against a weakening US economy and likely further US dollar weakness.
- We invested in BCE, which we see as 'quasi' cash despite trading at a substantial discount to the $42.75 agreed sale price. Even with the news in today's papers, there appears to be very little wiggle room for the lenders to get out of their commitments. We have since increased exposure to around 4% of portfolios believing the deal will close as planned in December 2008. If so it will result in a very decent capital gain and provide additional liquidity to redeploy once the sub-prime dust has (hopefully) settled.
- We also reduced small cap stock exposure to almost zero. The sector is down 45% year-to-date and represents 15% of the Canadian market.
- For fixed income investors it has become extremely important to be conscious of the investment quality of their holdings. We have always been vigilant in this regard and our holdings are all well above investment grade. We have noticed in some instances that a "baby with the bathwater" syndrome has been evident and we have taken advantage of these opportunities.
The difficulty is what to do with the stocks that you are holding and watching decline.
One prime example is the fertilizer stocks. We believe the stock price weakness is pricing in a collapse in crop pricing as Agrium and Potash are trading at their lowest valuations in the past 10 years at 2.9x and 2.3x earnings, respectively. Global growth challenges are evident, but we believe long-term profit is not materially compromised.
A word about Research in Motion and why it is still in our model portfolios. This stock represents one of the few if not only true technology growth stories in Canada. The P/E multiple has fallen to 13x, its lowest ever. This stock traded at 30x up until the recent market collapse. Even in a slower growth economy, growth should still be 40 to 50% as they begin to penetrate the consumer market in a meaningful way.
Capital preservation is an extremely important objective in our investment strategy. During the month of September, we sold down our positions in Thomson Reuters, Barrick Gold and Pepsico in order to increase our cash position. As a result, we now have a cash balance of approximately 11%, along with a gold weighting of 10%. Net net, we have a full 20% of the equity portion of portfolios in holdings we would classify as portfolio insurance. This is in addition to the bond and preferred shares that can make up a good percentage of your personal portfolio - depending on our original asset mix decisions.
The portfolios are conservative and defensive despite the severe decline in prices recently. We believe that our vigilance, discipline and collection of excellent investments will successfully deliver on our objective to deliver solid long-term growth despite this set back as has been evidenced by market crashes throughout history
We should also not forget the need for counter intuitive behaviour to invest successfully:
Unfortunately it always feels this depressing at or near market bottoms, which we keep in mind although it is of little solace during this unprecedented volatility.
My final message is that the raging fire will eventually burn down enabling fresh growth. As always please feel free to call.
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