I am not a fan of narratives in investing and I’ve written previously that ‘This stock is a great story’ is among the most dangerous sentences an investor can hear from their broker. Stories and fairy tales have many social functions and chief among them is to simplify an objectively random world into an organized, intelligible, controllable sequence of events.
The market, as shown convincingly by Princeton economist Burton Gordon Malkiel in A Random Walk Down Walk Street, is certain to eventually turn most stories into nightmares.
There was a great story behind the exchange-traded funds allowing shorting of the CBOE Volatility Index, but it was the fine print, which included warnings that the products were not designed to be held longer than a few trading sessions and could be liquidated at any time, that proved more important.
Morgan Housel of venture capital firm Collaborative Fund recently detailed another aspect of narrative that is poorly suited to investors – the worst things get, the more we rely on stories. Mr. Housel cited research showing that in plague-ridden London in 1665,
“The people were more addicted to prophecies and astronomical conjurations, dreams, and old wives’ tales than ever they were before or since” and he concludes that “When things are calm people believe what they tell themselves. When things are crazy they believe what other people tell them.”
Last week’s market volatility had investors looking to economists and strategists in a similar way, even though Mr. Housel clearly believes their output is no more a reflection of reality than the ‘conjurations’ from 350 years ago or the Brothers Grimm,
“The history of financial forecasts is long. And it is pathetic … The average difference between [chief market strategists’] forecasts and what the market actually does is 14.7 percentage points per year.”
These facts leave investors in a difficult position. The tendency to look for answers or reassurance when markets become volatile is likely to lead directly to bad advice, potentially making the problem worse.
For me, the best way to mitigate these risks is to read everything remotely credible I can get my hands on, rather than grasp on to one view that best suits my mood or prior biases. Over time, by comparing forecasts to actual results it’s possible to sort out higher quality research. At least, I can find specific areas where some strategists are stronger than others. This process has led me to trust (but never entirely) Merrill Lynch’s Savita Subramanian, Credit Suisse’s Andrew Garthwaite and Goldman Sach’s David Kostin above other storytellers.
Importantly, this reading is best done before volatility hits, to help avoid reaching for the wrong advice at the worst time.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Rogers Sugar Inc. (RSI-T). This is a defensive dividend stock yielding 5.8 per cent. It is a stock that is holding its value, resilient and steady in the face of market volatility. Analysts are forecasting a potential total return of nearly 18 per cent over the next year. Jennifer Dowty reports.
Diversified Royalty Corp. (DIV-T). This stock yields 6.8 per cent with a unanimous buy call and expected gain of 30 per cent. The stock appeared on the negative breakouts list last week with the share price nearing oversold levels. Investors are patiently awaiting news of a fourth royalty acquisition – a potential catalyst for the stock. Diversified Royalty is a corporation with three royalty streams from Sutton, Mr. Lube, and the AIR MILES trademarks in Canada. Jennifer Dowty reports.
Optimism for Spotify debut reaffirms the allure of tech stocks
Remember those crazy days when mobs of eager investors would drive tech stocks to dizzying gains in their first few hours of public trading? Believe it or not, we haven’t seen the end of such episodes. This may come as a shock if you’ve wallowed in recent coverage of Facebook Inc. and its well-deserved woes. It’s easy to emerge from the deluge of negativity with the impression that all tech stocks now face a chilly new environment. The evidence on hand, though, suggests otherwise. One case in point is Dropbox Inc., the digital file storage company, which soared more than 35 per cent in its public debut on Friday. Ian McGugan reports.
Top economists weigh in on NAFTA, home prices and the loonie
Global economic concerns are at the forefront of investors’ minds, with corporate earnings, for now, taking a back seat. Economic issues are driving the stock market moves. Most recently, trade war concerns have created market volatility. Last week, Gluskin Sheff + Associates Inc. hosted a well-timed economic forum at the Four Seasons hotel, which featured viewpoints from Canada’s leading economists. David Rosenberg, Gluskin Sheff’s chief economist and strategist, moderated a panel discussion with outlooks provided by: Douglas Porter from BMO Financial Group, Benjamin Tal from CIBC World Markets, Craig Wright from RBC, Frances Donald from Manulife Asset Management, and David Doyle from Macquarie Securities. Jennifer Dowty reports.
Why dividend stocks were outperformers in a week of market turbulence
If a dull stock with a dividend yield above 5 per cent looks very appealing in a world defined by an unpredictable U.S. President and the threat of an escalating trade war with China, you’re probably not alone. During last week’s return to stock-market turbulence, dividend stocks have outperformed the broader market, suggesting an important shift in investor sentiment from the downturns that defined market activity earlier this year. David Berman explains.
Taking on extra risk can prove rewarding with these bonds
Look to the corporate bond market if you’re wondering about the rewards you get from taking on extra risk. A well-diversified short-term corporate bond ETF would get you a forward-looking yield of about 2.5 per cent these days. If you check out individual corporate bonds that just make the cut for being considered investment-grade, you’ll find yields from a variety of issuers of between 3.5 and 3.9 per cent. Here are some examples found the week of March 19-23 at one particular online brokerage firm, reports Rob Carrick.
Thanks to Trump’s ignorance, gold is looking a lot more attractive
Well, it’s finally here. As Gordon Pape predicted, U.S. President Donald Trump has launched a global trade war, demonstrating yet again his ignorance of both history and economics. The last time we embarked on this disastrous path was in 1930, and we all know how that ended up. Given this background, he suggests it’s a good idea to hold some cash and have at least a little exposure to gold in your portfolio. There are already signs that the safe haven of gold is becoming more appealing to investors as economic and geopolitical risks rise; last week, the precious metal advanced 3.3 per cent. Gordon Pape looks at the best ways to invest in gold.
Why the all-banks stock portfolio isn’t for you
Admit it, you’ve wondered whether you could own nothing but bank stocks and do great as an investor. The answer: Probably, but don’t try it. Readers have asked this question many times over the years, most recently in the past week. “Would owning nothing but Canadian banks and lifecos long term be harmful?” someone asked in an e-mail. Rob Carrick has been known to be critical of the banks and the way they do business, but they are arguably Canada’s most reliable long-term wealth builders for shareholders on a total return basis (dividends plus changes in share price). Consider the following stock indexes, which invest, respectively, in the Big Six banks, banks, insurers and investment firms and the broader Canadian market. Rob Carrick explains why an all-bank portfolio won’t work.
Equity market’s ‘last line of technical defense’ holds, for now
Scott Barlow says he spent a number of years believing that technical analysis, such as astrology, only seemed accurate if you really, really wanted it to. This view changed as it became clear that technicians’ favourite phrase – “price has memory” – is often true. Technical market factors were front and centre amid last week’s sell-off, to the point where hundreds of portfolio managers were staring in terror at one of the simplest technical indicators, the 200-day moving average, praying that it held. Bloomberg called the 200-day trend line the market’s “last line of technical defence” and, thankfully, this line held. Scott Barlow explains.
The hidden pitfalls when hunting for cheap stocks
Value investors love to pick stocks with low price-to-earnings ratios and a wealth of studies back them up. But recent research indicates there might be a devil hiding in the details. Nicholas Anderson wrote a paper called The Performance of Relative-Value Equity Strategies that looks at different P/E-based methods while doing his MBA at the University of Chicago Booth School of Business. Norman Rothery takes a look at what he found.
Ask Globe Investor
Question: Is there any way to recover the U.S. withholding tax on stocks held in a tax-free savings account?
Answer: No. Tax-free savings accounts (TFSAs) aren’t actually “tax-free” when it comes to the dividends of U.S. companies. A withholding tax of 15 per cent is applied to U.S. dividends, but you cannot recover this money or use it as a foreign tax credit on your Canadian tax return. If you hold U.S. stocks in an account that is specifically for retirement purposes – such as a registered retirement savings plan, registered retirement income fund or locked-in retirement account – withholding tax on U.S. dividends is waived under the Canada-U.S. tax treaty.
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What’s up in the days ahead
David Berman will take a look at the investment case for Athabasca Oil, while John Heinzl does the same for Canadian Apartment REIT.
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Compiled by Gillian Livingston