Most investors have been warned about the risks of attempting to predict future corporate or market results and yet most of us keep reading columns and research attempting to do it. Venture capitalist and financial author Morgan Housel, after admitting he follows strategist forecasts closely despite the general futility of the results, provided a list of “12 common flaws, errors, and misadventures” that occur when predictions are made.
Mr. Housel, as usual, provides interesting insight throughout the column but I want to focus on one particular segment under the heading “Predictions are easiest to make when patterns are strong and have been around for a long time – which is often when those patterns are about to expire.”
The author writes, “Statements like “this trend has been around for 20 years” make forecasters feel good because it is the data equivalent of safety in numbers. But if you believe in reversion to the mean – and most forecasters do – they should give you pause. Social trends become obvious when they’re ubiquitous and old, both of which encourage the trends to become exploited, priced out, and cliche – which is when they stop becoming trends.”
The Canadian housing market provides an excellent example of this analytical fallacy. There are a number of reasons like population growth that have driven domestic real estate prices higher by 6.3 per cent annually since 1999 but interest rates have played a central role.
Homeowners in past decades have been massively assisted by falling mortgage rates making the carrying costs of debt increasingly palatable. Mortgage rates have been falling since the early 1980s , however, and don’t have much room to fall.
At this point, household debt levels remain near record levels and affordability has never been lower in a potential sign that real estate as an investment strategy has become, in Mr. Housel’s words, ‘exploited, prices out and cliché’.
This is not to suggest an imminent collapse in the Canadian housing market. There’s no hint of interest rate hikes that will reverse the near-four decade decline in rates. It’s also the case however that the ‘housing prices only go up’ sentiment is generally so deeply ingrained that it is rarely questioned.
The faith is justified based on asset returns for the past decade but as Mr. Housel points out, expecting long-term trends to extend forever is a form of forecasting that often goes awry.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
TMX Group Ltd. This dividend stock has a history of rallying the day after its reports its quarterly earnings results – for 14 of the past 16 quarters. Last quarter, the share price soared over 7 per cent the day after it released its better-than-expected first quarter financial results. The share price is up 32 per cent year-to-date, providing investors with capital appreciation in addition to its attractive 2.7 per cent dividend yield. Its next earnings report is due out Aug. 7. Jennifer Dowty profiles the stock (for subscribers)
The Rundown
Three pockets of the market for the value-oriented investor
What does a cautious, value-oriented investor do in this market environment? Maybe it’s time to stop looking for bargains that no longer exist and instead search for potential deals – pockets of the market that aren’t obviously bargains right now, but could surge given the right shift in circumstances. Three areas stand out. Ian McGugan looks at their pros and cons, as well as what is needed to send them higher. (for subscribers)
DIY investors: Make sure you avoid the mutual fund fee trap at online brokers
DIY investors, please check your snobbery about mutual funds for just one minute. Following a push from regulators a year ago, online brokers are getting better at providing access to funds with lower fees than those sold by investment advisers. Rob Carrick explains what you need to know (for subscribers)
The earnings rush
U.S. second-quarter results are already in full swing, and Canadian results will arrive in earnest this week with reports from the likes of Canadian National Railway Co., Restaurant Brands International Inc., Loblaw Cos. Ltd. and Suncor Energy Inc., and Rogers Communications Inc., among others. Analysts are cautious. David Berman previews what to expect. (for subscribers)
Prospect of Fed cut pushing dividend investors into tech, energy
An expected interest rate cut by the Federal Reserve later this month is pushing yield-oriented U.S. fund managers further afield in search of income at attractive prices. While nearly half of the companies in the S&P 500 have a higher dividend yield than the roughly 2.04-per-cent yield that benchmark 10-year Treasuries now offer, value-conscious fund managers say they are hesitant to buy shares of companies in dividend-rich utilities or the real estate sector because their valuations are well above historical norms. Instead, fund managers say, they are picking up yield in sectors ranging from energy to technology. Read more from Reuters (for everyone)
Others (for subscribers)
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Canadian billionaire invests $1-million in this stock
The Globe’s stars and dogs for the week
Ask Globe Investor
Question: I think any of the big five banks are too big to go bankrupt or even stop paying dividends, yet you recommend GICs and bonds to people who want little risk. Why? Peter W.
Answer: I agree with the first part of your comment – Canadian banks are probably too big to fail. But that doesn’t mean they’re immune from a stock market collapse. Look what happened in 2007-09. Shares in the major banks lost about half their value.
For example, shares of Bank of Montreal went from the $70 range in February 2007 to below $30 two years later. The yield on the stock rose to over 11 per cent as investors were convinced a dividend cut was coming. That didn’t happen, but it wasn’t until October 2013 that the stock return to the early 2007 level.
Some investors panicked and sold their bank stocks at big losses. For older people in retirement, that was a disaster.
The bottom line is that, no matter how safe a company may appear, stock market risk always has to be considered. GICs eliminate that risk. You sacrifice return but gain safety. As for bonds, with interest rates falling they are performing well right now. They are higher risk than GICs, but not by a lot, especially if you stick to short- and mid-term issues.
--Gordon Pape
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What’s up in the days ahead
Investor advocates are expressing frustration that fund companies are still able to charge early withdrawal fees on mutual funds, nearly a year after securities regulators concluded they should be banned. Clare O’Hara will update the situation.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Darcy Keith