Amazon founder Jeff Bezos was once asked to forecast how the company’s businesses would change in the coming decades. He said that he didn’t waste any time on that, he was focused on what was not going to change. Online shopping customers, for instance, would always want low prices and fast delivery, so Amazon could afford to commit substantial assets towards those goals.
Venture capitalist Morgan Housel brilliantly applied this theme to investors in the extended essay “Same as it ever was.” The author’s overriding thesis is that while market behaviour is impossible to predict, investor behavior is consistent over time.
The essay covers the importance of optimism, even if delusional, and the tendency for positivity to be most prevalent when things are at their worst. He notes that the term “American Dream” was coined and proliferated in 1931, at the very depths of the great depression when it seemed least applicable.
Mr. Housel quotes Tali Sharot, author of The Optimism Bias, “In order to progress, we need to be able to imagine alternative realities—not just any old realities, but better ones, and we need to believe them to be possible.”
The author sees the recent surge in day trading as a sign of potentially delusional optimism, and it’s also quite possible that the market’s recent disregard of valuations – taking stock prices higher while short term profit growth craters - is another sign of misplaced enthusiasm.
Section three, which involves the psychological tendency to avoid short-term annoyance at all costs, even if those costs are extreme in the long term. “The history of the stock market is that it goes up a lot in the long run but falls often in the short run” he writes, “The falls are painful, but the gains are amazing. Put up with one and you get the other.”
Most investors are aware of this - buy and hold has been proven to be the most successful investing strategy. Despite this, the finance industry revolves around doing a poor job of advising investors on how to sidestep inevitable market declines.
I am a big fan of this essay as readers can probably tell and believe it provides a lot of wisdom for investors who read it in full. On the other hand, it doesn’t lead to any immediate actionable portfolio guidance, if I’m being honest.
In general, Mr. Housel’s guidance implies that investors should be on the lookout for market over-exuberance but also recognize the strong psychological foundations for optimistic sentiment and its ability to push equities higher. Also, investors would benefit from doing some soul searching in preparation for a time where a higher pain threshold in the short term leads to higher investment returns in the long run.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
TFI International Inc. (TFII-T). Recently, many analysts have revised their expectations higher taking the number of buy recommendations up to 15. The stock has a current yield of 2.2 per cent with a quarterly dividend that has steadily grown over the years. Jennifer Dowty has a full profile of the company.
In a market going to extremes, middle-of-the-road stocks hold appeal
Confronted by radical uncertainty about how – and when – economies will emerge from lockdown, investors are going to extremes, bidding up the price of both aggressive risk-on and conservative risk-off investments. Ian McGugan writes (for subscribers)
A barrage of bad news is set test already rattled investors
One day they’re riding high on expectations for a V-shaped recovery, or a favourable report on a vaccine test, or maybe just because the sun is shining. The next, they are dumping stocks and searching for risk-off alternatives. Gordon Pape looks at the sources of turbulence (for subscribers)
Others (for subscribers)
Monday’s Insider Report: Chairman and management executive are buying this REIT yielding 7%
Others (for everyone)
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Ask Globe Investor
Question: I am the subscriber of a self-directed registered education savings plan for my 22-year-old grandson and 19-year-old granddaughter. Both have attended postsecondary school but neither is enrolled currently and it is uncertain if they will ever return. Can I withdraw part of my contributions without collapsing the RESP? I would like to leave the RESP open in case one or both grandchildren return to school at some point.
Answer: Yes, you may withdraw, at any time, all or part of any contributions that remain in the RESP without closing the plan. Withdrawals of contributions are tax-free. However, you may have to repay Canada Education Savings Grants (CESGs) associated with these contributions if neither beneficiary is currently eligible to receive an educational assistance payment (EAP). Generally, a beneficiary is entitled to receive an EAP – which is paid out of the grants and earnings in the plan – for up to six months after ceasing enrollment.
In addition to withdrawing contributions, you might consider making an EAP withdrawal, if possible, as these payments are taxed in the hands of the beneficiary, often at a low tax rate. If neither grandchild returns to school, when you terminate the plan you will have to give back any grants remaining in the RESP and pay tax at your marginal rate – plus a penalty tax of 20 per cent – on the accumulated income in the plan. So, requesting an EAP now, if that option is available, might be advantageous.
Read all the details here from John Heinzl. (for everyone)
What’s up in the days ahead
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Compiled by Globe Investor Staff