January 17, 2015 Comments

On Friday, the S&P 500 was 1.3% and Toronto was up 1.9%.

It has only been two week but our Stock picks have not started the year off well. Canadian Western Bank and Melcor are each down about 15% since December 31 (and down a lot more than that from their highs). I believe these to be well managed quality companies that will grow in the long term and that therefore will rebound. I can’t say when because the earnings are tied to the performance of the western economy which in turn is tied to oil prices. The stock prices are already effectively pricing in a significant decline in earnings. The stock price is also effected by the level of fear or confidence of investors.

Bank of America is down 14% since December 31 and is more speculative but is tied to the America economy which has been performing well. I expect the share price to rise here as long as the American economy stays strong.

We had Bombardier as a speculative pick and had noted it was poorly managed. It’s down 32%. Even its pref shares which we also rated speculative Buy are down 18%. It announced a “pause” (read suspension) in the development of a new model of its Lear Jet. This would also be accompanied by a large write-off and that was serious for a company with an already weak balance sheet. I am hopeful that this company will see better days ahead but that is far from certain. It is very weak financially and therefore bankruptcy is not out of the question although I don’t think that will happen.

Given the declines in some of our higher rated stocks, my own portfolio is off to a poor start this year as well, down about 5%. (I own all of the five just mentioned.)

As investors we know that stocks don’t rise in straight lines. And we tend to think that once our portfolio has reached a certain level it should only grow from there or at least stay level. But that is not realistic. “Volatility” (i.e. decline) is the price we periodically pay in order to be in the equity markets and enjoy gains in the long term. Not every investor who loses money gains it back but I think it is safe to say that there are no long term investors, no matter how successful they are, that have not experienced significant losses along the way and usually a lot more often than once. Lower markets and lower individual stock prices also often present opportunities to buy at attractive prices.

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