Not comfortable with the high-flying stock market? Neither is money manager Vito Maida.
Warning: Mr. Maida isn't to be judged on his results this year. The $75-million portfolio he runs for the high-net-worth clients of his firm, Patient Capital Management, made 11.1 per cent through the first nine months of the year, compared to 30 per cent for the S&P/TSX composite index.
No, we're not checking in with Mr. Maida for bright ideas on how to make money in today's stock markets. His specialty is preserving money, which is what he did last year by making 4.5 per cent while the index plunged almost 33 per cent. Safety happens to be the Number One theme among individual investors right now. That's why there are billions sitting in money market funds and savings accounts, and why bond funds are such hot sellers right now.
Historically, when we've had big runups off the bottom, markets have come off anywhere between 20 and 30 per cent, easily. — Vito Maida
It's common to hear investing pros marvel at what they see as the passivity and fearfulness of the individual investor. But with the stock markets up from their bear market lows by about 50 per cent in just eight months, there are those in the financial world who think stocks have gotten ahead of themselves. Mr. Maida is one of them.
"We think that going forward, there is a substantial amount of risk in the markets," he said in an interview. "We don't believe the fundamentals justify the substantial rise in equity prices."
The opposite view is that stocks are priced just fine if you believe the economy is on the rise again. But for every bullish sign, there's a discouraging signal that a quick return to better times is by no means assured. That's why you should be aware of the downside risk of the stock market decline, just like Mr. Maida is.
You won't get a precise market forecast from him, but he does offer a long-term perspective on what could happen to the markets. "Historically, when we've had big runups off the bottom, markets have come off anywhere between 20 and 30 per cent, easily." That's not as bad as the peak-to-trough plunge last year, but it's exactly the kind of scare that people are trying to insulate themselves from by investing conservatively.
Mr. Maida judges the price of stocks by looking in large part at price-earnings ratios and dividend yields. One of the more alarming indicators he's watching is the dividend yield of the entire S&P 500 stock index. Coming off a historically harsh bear market, you'd expect the yield for the index to be somewhat above normal levels. Remember, share prices and dividend yields move in opposite directions.
In fact, the S&P 500 dividend yield today is around 2 per cent, which is not too much higher than the 1.5-per-cent lows reached in the bull market of the late 1990s. The S&P yield did spike up to almost 4 per cent in the worst of this bear market, but even that's far below the 6-per-cent-plus level reached in the troubled days of 1982.
Mr. Maida started managing money for Patient Capital in the spring of 2000 and he has not had a losing year since, even though the S&P/TSX composite has been down four times. On the flip side, he has lagged the index in each of its up years since March, 2001.
Dividend yields are just one of many ways to measure the markets, but in this case they send a definitive message. The market never got as cheap as it did in past declines, and today it's not cheap at all.
Mr. Maida's reaction has been to keep 40 per cent of his portfolio in cash, which means safe stuff like government Treasury Bills. Stocks he's holding now include BCE and a pair of global names, Nokia and Diageo. The sector he's buying into is U.S. health care. His rationale is that this sector has been undeservedly beaten up because of speculation about reforms of the U.S. health care system.
"Quite frankly, that's the only one [we're buying]. We think that everything else is at fair value or expensive."
Included in that group are Canadian resource stocks, which now account for 47 per cent of the S&P/TSX index. The justification for the recent rise in energy and metals stocks is the resilience of economic growth in emerging markets like China and India. But Mr. Maida says these economies depend to a large extent on demand from the United States and Europe, where there's no definitive word yet of a sustained economic rebound.
Mr. Maida started managing money for Patient Capital back in the spring of 2000 and he has not had a losing year since then, even though the S&P/TSX composite has been down four times. On the flip side, he has lagged the index in each of its up years since March, 2001. Put it all together and you've got annualized returns that have outperformed the index by about an estimated 1.5 percentage points after fees.
Today, the man who made his money by putting safety first sees some serious downside risk in the market. All you nervous investors, your concerns have been validated.
