Mississippi-based independent investment firm Movement Capital published a useful article warning about how not to invest during crisis periods. The column “Three crisis strategies to avoid” cautions investors not to think only of extreme scenarios, to never underestimate risk, and to maintain a disciplined investment process.
In the first section, author (and founder of the firm) Adam Collins notes that extreme scenarios get more traction because business media “makes a living out of freaking us out.” He also points out that investors are psychologically anchored to the financial crisis because that was the most recent recession. But that crisis was extreme relative to average downturns, in both degree and time, and future recessions are unlikely to be as punishing.
Many investors are reassessing their risk tolerances, and Mr. Collins sees this as a positive. He recommends that investors first calculate the total dollar amount of their equity positions. Then, ask themselves if they could tolerate a 50-per-cent decline without giving up and going to cash. If the answer is no, they need to reduce their equity allocation, in his opinion.
Abandoning discipline is the third counterproductive investment strategy for investors to avoid in the current crisis. The author quotes Ritholtz Wealth Management’s Ben Carlson, who stated “anyone can build a portfolio. Not everyone can stick to it.”
Mr. Collins used the metaphor of a hotel owner before a storm to underscore the importance of holding a diversified portfolio through periods of volatility, “Imagine you owned a hotel near the beach and a bad storm is coming. Business will slow down. Are you going to sell the hotel before the storm? No. You know the long-term value of the business isn’t impacted by a short-term event.”
Periods of fear and anxiety are the price investors pay for the long term wealth available in the stock market simply by buying and holding. The trick for most investors is to avoid getting in their own way – by panic selling quality stocks, for instance - when things get difficult.
-- Scott Barlow, Globe and Mail market strategist
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Goldman: These 26 stocks are well-positioned to get through a devastating economic downturn
It’s awful out there. But some observers believe that there are opportunities among the stock market wreckage, and you don’t need to embrace a lot of risk to find them. David Kostin, a strategist at Goldman Sachs, identified 26 U.S. stocks in the S&P 500 that look well-positioned to get through a devastating economic downturn – yet, on average, these stocks are trading at valuations that are lower than they were at the depths of the financial crisis in 2009. David Berman reports
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Ask Globe Investor
Question: Do you believe companies will cut their dividends in the current crisis?
Answer: Some already have. On Thursday, Ford Motor Co. (F) suspended its dividend to provide “near-term financial flexibility.” Analysts and investors speculate that aerospace company Boeing Co. (BA) and energy giant Exxon Mobil Corp. (XOM) could be next. Given how the pandemic is disrupting virtually every sector of the economy, I expect that we will see plenty of dividend reductions over the next few months.
That said, some dividend-paying sectors are in a better position to ride out the crisis than others. Utilities, power producers, pipelines and telecommunications companies, for example, provide essential services and benefit from contracted or regulated cash flows that insulate them, to an extent, from the economic shocks of the coronavirus.
“Despite their defensive characteristics, the utility, pipeline and telecom sectors have been hit as indiscriminate selling of all stocks grips the market. We believe this is a buying opportunity,” Odlum Brown analyst Cory O’Krainetz said in a note this week.
“It is certainly possible that growth could slow as businesses operate at reduced capacity, but that will likely be temporary and does not diminish the long-term value of the businesses. The businesses are also well capitalized and the names we favour have sustainable dividend payouts.”
Companies that Odlum Brown considers attractive, ranked in descending order of risk, include Enbridge Inc. (ENB), TC Energy Corp. (TRP), Telus Corp. (T), Rogers Communications Inc. (RCI.B), BCE Inc. (BCE), Canadian Utilities Ltd. (CU), Emera Inc. (EMA) and Fortis Inc. (FTS).
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What’s up in the days ahead
John Heinzl will explore the topic of looming dividend cuts further, and Brenda Bouw looks at how to use the Volatility Indicator as a signal for when to get back into the market.
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Compiled by Globe Investor Staff