Newsletter September 18, 2015

InvestorsFriend Newsletter September 15, 2015

It’s been a Bad Year for Investors. Or Has It Really?

By some measures it has been a bad year for investors, especially for Canadian investors. The Toronto Stock Exchange index is down by 6.7% this year to date. And the S&P 500 index is down by 4.9%.

But really, those are not exactly devastating losses. Stock indexes don’t go up in straight lines and based on history a 7% decline is really pretty tame.

And given that the Canadian dollar is down 12.1% this year, Canadians who lost 4.9% by investing in the S&P 500 are actually up about 7.2% on that investment. And then there are dividends that add another 2% or so annually to the gains on stock indexes.

All in all, reports that the average Canadian investor has been mauled by a bear market this year are greatly exaggerated.

But yes, there have been some ugly losses on various individual company shares. Certainly energy stocks are generally down significantly and also the shares of most companies exposed to the western Canadian economy.

Among the companies that I follow (but don’t necessarily own) , some of the nastier losses include a Canadian bank that is down 28%, Walmart down 26%, Bombardier down 63%, and a number of “rate reset” preferred shares that are down about 25%.

But, among the bright spots are a large American bank that is up 9% (with the currency gain of about 12% for Canadians being on to of that), and Dollarama up 45%.

Even if it were such a bad year for stocks, that would really not be a totally bad thing for most investors. Investors who are still in the savings phase as opposed to the retirement/spending phase can always take advantage of lower prices as they save additional amounts each year. Also anyone with a high allocation to cash can move more funds into stocks at lower prices if they wish.

The Basics of Investing

With the seeming volatility of stock indexes and particularly of individual stock prices. it is always a good idea to remember some of the basics of investing.

Contrary to the opinion of non-investors, stock investing is not gambling and it is not a zero-sum game where some must lose in order for some to win.

While stock prices jump around in what at times seems to be a random manner, investors should always remember that underneath that bouncing stock price lies a real business. A business that in most cases is a money making operation and which usually has earnings that are FAR less volatile than the stock price.

To own stocks is to own a piece of corporate Canada or corporate America (or corporate the rest of the world). Most people as they go about their daily shopping, pay their monthly banking costs and monthly utilities are pretty sure that the companies that they are dealing with are making a profit. Yet these same people are often afraid that if they invest in the stock market, even on a widely diversified basis, they will lose money even if they hold for some years. Well, it would be pretty hard for both of these situations to be true. If corporations are regularly making money from you as a customer then it is pretty certain that if you become the part owner of a diversified group of companies then you will make money over the years (though not every year due to stock price gyrations).

If you are prepared to think about stocks as representing  ownership in real businesses rather than thinking of stocks as just a price that jumps around then there are opportunities today to find businesses for sale at discounted prices.

What about the World’s Economic Problems?

There will always be lots of warnings about the economy. Warnings about excessive government and personal debt. Warnings that money is not backed by gold. Warnings that this is no time to invest in stocks. There is no end of warnings. These kind of warnings have been around for literally hundreds of years. Occasionally what is warned of comes to pass, but usually not.

And the reality is that the most (but not all) companies in the Toronto Stock index and in the S&P 500 are making far more money per share today then they did ten years ago. And I suspect that they will be making even more in another ten years. And that their share prices will reflect the higher earnings.

So my strategy will be to continue to ignore the warnings and to continue to invest in stocks.

Valuation of the Toronto Stock Index

I updated my analysis of the valuation of the Toronto Stock Index and my conclusion is that the index is moderately under valued at this time. Most of the time in the past this analysis has indicated that the Toronto stock index is fairly valued or over valued. But right now it is indicating a modest under valuation.