Peaceful Summer Waters Juxtaposed With Choppy Markets

Many of us look forward to and get to enjoy, a summer with a body of water, to immerse ourselves in physically and / or scenically.  When we are in that place, nothing else seems to matter.

Sorry, but I have to take you away from that utopian place for a few minutes to give some perspective to recent investment world “static”.

We have gone through a 2nd day this month of ~3% one day declines.  The one today was the 4th this year.

Interest rates have been going up since early 2017 (in the US) to mide-2017 (in Canada).  That is from a very low floor of where interest rates were for sseveral years. 

In the US (I’ll use there numbers from here on in as they are the still the economy that is most watched with or without Trump), interest rates went from 0.75% up to 2.5%.  This was because the economy was getting stronger and stronger with each passing month. Now, the concern is the economy is getting weaker and some worry, will drop economies worldwide, into a recession. 

To stop that weakening, interest rates were cut in the US.  This move from gas pedal to brake, back to gas pedal, is the most powerful tool a Central Bank (“Fed”, Bank of Canada etc.) has to steer economic growth.   Apply the brakes (raising interest rates) when things get too heated and put on the gas (lower interest rates) when things are slowing down.

The latter is where we are now.  The slowing economy is exacerbated particularly by Trump vs China trade and tariff talk and actions.  The market hates uncertainty and that is what he have.  We don’t know how much the economy will slow or if it is finished slowing and will continue growing.

The question you may have is “how does that effect me and my portfolio?”.  The obvious thing is every day you look at your portfolio you’ll see changes in the total value of 1, 2 or 3% up or down.

 One of my very good clients and friends (Tyler) forwarded me an email he received from another Financial Advisor (thanks for that Tyler).  In summary it said, protect yourself from a 30% decline by investing in bank deposits.  Very short sighted and pure speculation particularly since 2008 was -34% (and see where we are now) and before that 1974 which was -28% (which was followed by +50% in the next 2 years).

We all need to invest in assets that will produce, healthy, long term results.  Trying to forecast what will happen in the short term is guessing.  If however, your most pessimistic guess is right, when will you have the emotional fortitude to buy those assets back again, at very cheap prices?  Not at all likely and highly improbable as we’ll be in an environment where life as we know it, will seem like it’s ended and things are only going to get worse (that is what the vast majority thought in the early parts of 2009).

To ensure your portfolio does what it needs to do in the long term, you need to hold assets (pieces of businesses) that are sometimes uncomfortable to hold.  These assets MUST be fairly valued (not expensive) and better yet, cheap in relation to what a prudent business peron (ie Warren Buffett, Jimmy Pattison etc.) would pay for the whole company.  Operationally, these companies need to be able to make money in all kinds of economic environments and not be easily disrupted by new technologies or businesses.  In other words, they need to have a wide and deep moat around them. 

If you own a whole bunch of businesses like that in your portfolio (minimum 25 to maximum 100), your portfolio will survive (and thrive) through whatever can be thrown at it.  That is, as long each investment you hold is continually being scrutinized and analyzed thoroughly, to determine if your valuation and the prognosis of the investment is right (or close to right).  A small team of people doing that will sift out the bad thinking or bias, a person working alone, will definitely have.

It’s not market ups and downs that will subject your portfolio to permanent losses; it will be the quality of and the price you paid, for the assets you hold.  Permanent loss is the only thing you should be worried about, not temporary price changes due to market noise.

That’s it for now.  Enjoy the water.

PS.  Billionaire Jimmy Pattison just announced he is offering to buy the other 49% of Canfor he didn’t already own at an 81% premium to what “the market” priced the company at (and that was 2 days ago).  Jimmy’s enjoying the water, in his own special way.

PPS.  At time of posting this, the 3 worst days this year, are combined, -8.33%.  The 3 best days are +7.09%.  Typical market volatility. 

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