After some extended dock time, I’ve been re-engaging in the realities of the capital markets.
I put aside my summer reading list and am back on the hard core investment stuff. With the benefit of a fresh set of eyes, three things jumped out at me.
So far, I haven’t been able to read anything, or have a conversation with anyone, without hearing why Spain, the U.S. election or China’s slowdown make it a poor time to invest. I’m told it’s just too risky.
While all of these are serious issues, and will affect markets to varying degrees, macro mania has gone way too far. Investors are focused on the big picture, with little else being considered. Every market move is attributed to one of the above-mentioned issues or the central bankers’ reaction to them. The Economist Magazine went so far as to say, “… investors wait agog for every central-bank announcement, every publication of the latest meeting minutes, every speech by a board member.”
For an organism as complex as the capital markets, attributing moves to one announcement or event is misguided in all but the most extreme cases, as is basing an investment strategy on the same. Not everything that happens on a given day is related to the economic headlines. Stocks and bonds still go up and down as a result of earnings and valuations.
I’ve read articles about a stock or industry sector without seeing a single mention of valuation. It makes me want to go back to the dock and immerse myself in the wisdom of Warren Buffett, who once said, “Investors should price, rather than time, purchases. It is folly to forgo buying shares in an outstanding business whose long-term future is predictable because of short-term worries about the economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?”
Even though my cottage is 150 kilometres from the epicentre of the real estate debate (Toronto condos), I couldn’t miss seeing a consensus forming. Most experts, including Canada Mortgage and Housing Corp., are now acknowledging that residential real estate has stopped going up, but more importantly, they’re predicting that prices won’t go down far, or stay there for long. Interest rates remain low and there is a reasonable balance between supply and demand.
The pronouncements of limited downside remind me of Ben Bernanke’s now famous words about the U.S. housing market. In June of 2006 he said, “… it looks to be a very orderly and moderate kind of cooling at this point.”
If Canadian prices do pull back, moderation would be a spectacular result. I can’t think of any cycles as long and powerful as this one that weren’t followed by a significant downturn. Extreme cycles breed excesses that need to be corrected – stretched budgets, heavy leverage, speculation, and a mentality that can’t conceive of things being any other way.
Perhaps my best dose of real estate reality came from a conversation I had with a Toronto lawyer, who told me the story of when he and his wife bought their first home.
As it so happened, they bought exactly at the bottom of the market (spring of 1995), but not until they had spent 18 months going through empty open houses (“We had all the time in the world to look around”) and watching prices fall (“We had no fear of prices going up”).
His sobering tale is a reminder that real estate markets don’t always moderate; sometimes they turn ice cold.
It’s hardly a consensus, but it feels like we’ve gone full circle on the oil cycle. More and more research studies are predicting an energy glut as opposed to the long anticipated shortage. We’ve gotten to this point, which seemed inconceivable a year ago, as a result of heavy capital investment, the rise of renewables and cheap natural gas, technological advances such as hydraulic fracking, and a moderation of demand.
If the cost of filling up a ski boat is any gauge, we’re not at the glut stage yet, but the energy commentary has clearly changed.
As it does every year, my time away puts things in perspective. It helps keep the breathless headlines in check, put corporate fundamentals and valuations front and centre, build portfolios that are diversified across a range of assets, and prepare myself for both sides of whatever cycle is coming.