Mar 232020
 

Temperament is everything

Investors can often get in their own way. It can be hard to stomach a bear market. But it’s especially important at challenging times like these to keep our emotions in check, or else we could make mistakes and lose our shirts.

There are three types of investors during a stock market crash – those who sell, those who do nothing, and those who buy more. Which type are you? If you don’t already know then this can be an expensive time to find out. We learn the most about our investment behaviors when the market is tanking, not when it’s rising.

The global influenza pandemics of the 1950s and 1960s killed more than 1 million people each time. But eventually the world moved on and financial markets recovered. It’s a bit counterintuitive, but profits are made when you buy, not when you sell. This is because the price you pay for an investment is the main factor that will determine your future profit.

 

How to buy into the dip

If panic selling is not a good idea, then what can we do? Here are a few common strategies to consider:

  • Rebalance approach
    Although most securities are down, government bonds and other fixed income funds like (VSB.TO) have gained. Sell some of these low risk assets to buy beaten down stocks. But do it gradually. This also helps to rebalance your portfolio to your previous asset allocation.
  • Gradual nibble approach
    This requires you to have some cash saved up first. Every time the market falls by 10%, you put more money into the markets. Start with 20% of your cash balance. Go up to 30% of your remaining balance the next time. Then 40%, etc. This ensures that each additional time you buy, you are picking up stocks at lower prices.
  • Wait for a bottom approach
    Sit on the sidelines and wait for a sustained rally using technical analysis. Save and accumulate cash in the meantime. Store this cash in a high interest savings account or short term bond fund so it can be liquidated relatively quickly. Once market momentum starts going up again use 75% of the cash to buy stocks on the rise. Gradually buy more with the remaining 25% over time.

I don’t know which method works the best. But here’s what I’m doing:

As posted in my latest net worth update, I had about $150,000 in cash at the beginning of March – a very fortunate position to be in. ๐Ÿ™‚ I’ve already spent about $80,000 of that buying into this bear market over the last few weeks. My most recent stock purchases were Suncor (SU.TO), Pembina Pipeline (PPL.TO), Canadian National Railway (CNR.TO), and Fortis Inc (FTS.TO). I’m buying even as prices continue to fall because the stock market is down 32% from its high so far. Historically 32% is the low point of the average bear market. Although stocks could fall further, investing about half of my cash savings now guarantees I don’t miss out on the upswing in case we are already close to the bottom.

I plan to deploy another $50,000 into the market after technical indicators improve. There are two primary signals I’m interested in.

  • I’m waiting for the 10 day moving average to reverse direction from down to up.
  • I’m looking for the MACD signal to improve.

These indicators can be applied to individual stocks, sectors, or entire indices. For example, below is the S&P/TSX index. We can see it is not yet time to buy.

TSX drops 32% in just a few weeks

A new bull market should start once we see price momentum swing up. ๐Ÿ™‚ But this is speculation. Even after a short term bounce, there could be more downside before things actually start to turn around.

 

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Mar 162020
 

Opportunity for the well prepared

Well it’s finally happened. The record breaking 11 year long bull market has come to a screeching halt as stocks tumbled more than 30% in the fastest pace ever recorded. Last Thursday the TSX dropped 12% in a single day, the most in recorded history. But this should come as no surprise if you’re an avid reader of this blog. We saw this coming miles away. ๐Ÿ˜€

I began warning fellow investors two years ago explaining the early signs of an economic downturn. But since there were no red flags I didn’t expect an immediate market correction. Here’s an excerpt from that 2018 post.

Playing a strong defense game

So how did I prepare? Well last summer in 2019 I shared my thoughts on which asset classes would likely perform relatively well in a low interest rate environment. I wrote that adding defensive investments would make a lot of sense going into 2020.

So I had called out bonds, real estate, and precious metalsย as good assets to have, at least in the short to medium term. This is partly why I started to look for a rental apartment to purchase last fall.

Finally I warned readers several months ago of 10 signs that an economic downturn was just around the corner. My suggestion was not to sell everything and wait for the crash to happen, but instead to rebalance and reduce market risk. Here’s the final paragraph from that post.

planning ahead can protect the downside

Which brings us to the present. Both Canadian and U.S. stock markets are down about 20% year to date. Oof. ๐Ÿ™

It’s a good thing we had time to prepare for this downturn since the signs were plenty and hard to miss.

So let’s see how my prediction and planning paid off so far. ๐Ÿ™‚

  • As of writing this post gold is up 7.5% so far this year in $CAD.
  • Bonds have done well. The iShares Canadian Universe Bond ETF (XBB.TO) has returned +2% year to date.
  • Real estate is on the rise. We can use the Canadian Apartment Properties REIT (CAR.UN) as a proxy for residential real estate in Canada. This REIT has gone up 4% year to date. Personally, my new real estate purchase is earning me 6.25% a year in net rental income, after all expenses. Furthermore, the median rent price in the city of my new condo is up 15% this year. ๐Ÿ™‚

As I said last year, governments will go deeper into debt, print more money, and all of this will benefit holders of bonds, precious metals, and real estate. Owning these types of assets – which I have about $500K in right now – will add stability to a portfolio during a major stock market correction. The key is to use economic data to align my investments in order to limit downside risks. ๐Ÿ™‚

 

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Aug 192019
 

Millennials swell to 73 million as Boomers decline to 72 million

This year millennials have overtaken baby boomers as America’s largest living adult generation, according to population projections from the U.S. Census Bureau. This will have implications for how financial services are consumed now and in the future.

A new report called the Apex Millennial 100 takes a deep dive into the “unique investment behavior of a new generation.” It analyzed over 658,000 accounts held by millennials, which had more than 8,000 different stock holdings.

Apex CEO says that as “millennials mature into savvy investors, their evolving interests and values will shape a new wealth management industry, one that looks a lot different from the traditional model.”

Top 10 stocks held by Gen Y

Here is a list of the top 10 stocks most favored by millennials. Notice how heavily its concentrated on the high tech industry. ๐Ÿ™‚

Maybe it shouldn’t be surprising how many digital companies are on the list. As famous investor Peter Lynch suggests, you should always invest in what you know. You must value the business in order to value the stock. And these are the type of companies you would expect millennials to know most intimately about. I personally interact with several of these companies on a regular basis. ๐Ÿ™‚ You can see the entire list of 100 stocks here.

Some trending stock themes from the report include:

  • An increased focus on Canadian cannabis companies, which demonstrates the growing role marijuana may have on the medical and lifestyle decisions of millennial investors.
  • Chinese companies are leading the pack as millennials, who consider themselves to be global citizens, take the long view on international investments.
  • IPOs: Millennials consistently show support for companies that mirror their personal ideologies and offer products and services they understand and value, and will jump to invest in companies like Uber, Lyft and Slack as soon as they go public.

I can understand why other millennials are choosing these companies since I have a similar inclination to do so. I have fewer than 100 stocks in my portfolio. But somehow I hold most of the top 10 companies from the report. One of the most recent stock I purchased was Alibaba Group (BABA) which is already 15% higher since I bought it a couple of months ago. ๐Ÿ˜€ I guess I’m an example of your typical millennial investor. ๐Ÿ™‚ The only stocks I don’t own on that top 10 list are Tesla, Berkshire Hathaway, and Microsoft.

 

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Random Useless Fact:

According to Reuters, California and Texas are the 2 states with the highest number of school shootings.

Jul 252019
 

The Canadian federal election is coming up soon. And after that the U.S. presidential race will be in full swing for the 2020 election. Will the incumbent Donald Trump stay for another 4 years? It’s hard to make that call at this point. But perhaps there are some investment opportunities we can look at in the meantime.

Unfortunately the financial market as a whole isn’t particularly attractive right now. The S&P 500 currently has an Earnings Yield (EY) of just 4.45%. So if we put money in a stock market index fund today, we will likely receive an annual return of 4.45% based on corporate earnings, and assuming all other factors stay the same. This is noticeably lower than the long term average EY of 7.35%. Although 4.45% isn’t the worst return you can get, after paying maybe 1% of that in tax, and losing another 2% to inflation, the net real return on investment would be less than 1.5%.

That’s why I’ve decided to be more selective about which assets to buy. One thing you can always count on during an election is uncertainty. The market hates that word. One whiff of uncertainty and investors leave the stock market faster than a guy after hearing the results of the pregnancy test. This upcoming election comes at a time when the U.S. economy is slowing due to record amounts of debt weighing it down. According to the New York Fed, household debt increased for 19 quarters in a row, and is now nearly $1 trillion above the previous peak. Student loans have doubled since 2006 as a percentage of GDP. This will most likely lead to interest rate cuts in the United States to help bolster the economy. And my assumption is that the Bank of Canada will take similar action soon after, as it often did in the past. Lower interest rates usually boosts the stock market and commodity prices.

So for the next 6 to 18 months, I think the best asset classes to be in are bonds, prime real estate, and precious metals. Long term bond funds are highly sensitive to interest rate changes. But as long as we’re quite confident that rates aren’t moving up, then bond funds should provide a low risk option to earn some interest income, with the added potential for capital gains if the price of borrowing become cheaper.

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Feb 192018
 

A few years ago I bought 50ย shares ofย Avigilon Corp (TSE:AVO) at a price of $25 per share. Avigilon is a surveillance and security company based in Vancouver. The idea for the trade was to ride the momentum up and then sell it for a profit. Soon after however, instead of continuing to climb, the stock price dropped. ๐Ÿ™ “Oh no”, I thought. But rather than admitting defeat and selling my shares at a loss I decided to buy even more at $14 per share. ๐Ÿ˜ฎย This is a fairly risky move. I would only double down on a stock if I was really confident about its long term profitability. Doing this averaged down my cost per share.

Because I bought 100 more AVO shares when it was cheaper, my average cost dropped from $25 to $18 per share on 150 shares total.

Well this swing trade had gone on for long enough. I recently decided to get out of this trade and take my profit. ๐Ÿ™‚

Overall this has been a successful trade. My cost was about $2,600 including fees and interest charges. I used a small amount of margin to leverage my gains. I was able to sell all 150 shares last week at roughly $27 each with a total proceeds of $4,026.

That’s a decent 55% return on investment over the past 3.5 years, or annalized to 13% per year. ๐Ÿ˜€ Not too shabby, considering the broad market TSX composite index returned 2% per year over the same time.

Earlier this month AVO announced that it has a definitive agreement to be acquired by Motorola Solutions Inc. The takeover would value the company at $27 per share. This represents a generous premium for AVO and the stock price rose 17% immediately following the news. There doesn’t appear to be another company interested in making a better offer. This is probably the best price I’m ever going to get for this trade, which prompted my decision to sell last week. ๐Ÿ™‚

AVO doesn’t pay a dividend so now I can use the cash proceeds from selling the stock to either pay down debt, or invest in some dividend stocks to buy and hold. I haven’t decided what I’ll do with the extra money yet.

 

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Random Useless Fact:

In a study by Psychology Today, about 80% of people who have received mental health treatment say it was effective for them.