June 2017 Newsletter
Chinese Proverb: Crisis = Fear + Opportunity.
Witness Warren Buffett and Berkshire Hathaway invest up to $400 Million in Home Capital Group for a 39% ownership stake, and provides $2 Billion as a line of credit.
His cost price on the shares is just under $10 per share, and they went above $20 per share after the announcement of his investment.
Turtle Creek Asset Management who is one of our favorite money managers, showed the same investing acumen and discipline, as they continued to buy shares while they were sold in fear down to approximately $5 per share, and with their additional purchases increased their ownership position to 20% of the company.
I have learned during periods of crisis, and when share prices are down, and news headlines are spewing bad news, it is very difficult for individuals to write a cheque and invest more money. Yet, when share prices are going higher we are eager to pay more. This is an interesting divergence in our behavior when compared to how we behave as shoppers buying consumer products, where we like to buy products “on sale”.
At present the Canadian stock market is underperforming most other G7 stock markets. Our heavy weight in energy and commodities has contributed to this underperformance. Yet, Bank of Canada, Governor Poloz recently hinted that higher interest rates may be on the way. I personally don’t believe Canada will be raising rates any time soon, because our GDP growth lags the U.S., probable changes by year end in the U.S. Tax rates which will affect Canada, Energy and Commodity challenges, and a pending higher minimum wage in Ontario. The 15% surtax on real estate purchases by foreigners has also slowed real estate sales in Vancouver and Toronto. I think what Poloz was doing was to slow real estate sales, and increase the Canadian Dollar, without actually raising rates. He has been successful as shown by the increase in the Canadian dollar from 72 cents U.S. to almost 76 cents today and lower real estate sales.
To be a successful long term investor takes both patience and discipline. As our goal is to make an annual rate of return in the range of 6% to 8% per year net after all fees, there are times when we either underperform or outperform.
It is easy to become discouraged and impatient when we underperform. Should we go to cash, change a manager, modify our plan are common reactions.
Conversely, when we outperform there is often a desire to want to make our portfolios more aggressive.
There was a study done on ‘Investor Behavior’ which showed investors are 10 times more sensitive to a 10% loss in value than a 10% increase in value. For example, your investment portfolio of $100,000 drops in value to $90,000. You may be both upset and worried. Alternately, your portfolio grows from $100,000 to $110,000. You feel good, happy, next.
My experience is that investors often overestimate their ability to handle volatility.
I think it is reasonable to expect going forward that we will make our annual target rate of return of 6% to 8% per year as measured over a 5 year period, and this return includes dividends, distributions, interest income and capital gains, but it will not be a straight line of even performance annually. We need to work together and practice both patience and discipline to achieve our goals.
We are fortunate to work with a select number of wonderful investment firms and managers. I have spent my career searching for them, and doing due diligence. The firms I select are not perfect, but they are proven, their process and behavior is predictable and investment returns above average in my opinion. The firms include Barometer, Cambridge, Dynamic, RiverRoad, TD, and Turtle Creek to name a few.
Summer is normally a time of sideways performance in the markets, but not always. Our performance for 2017 will be measured at the end of the year. If you can, avoid looking at the value of your portfolio on a daily basis. That is my job. If there is something that needs to be changed or fine-tuned, I will call you or email you. Enjoy your family and sunshine.
I was recently given a very nice compliment by a long time client who said: “Fred, I continue to work with you and recommend you because you have integrity, you are transparent, and your behavior and performance are predictable.” I’m proud of this comment and appreciative.
If you need anything, or wish to discuss your investments and our plan, please call me.
Enjoy the summer and thank you for your confidence and privilege of working with you.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.