What do you think is happening?

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After four years without a market correction of any consequence, many people have become acclimatized to a stable and rising series of account statements.  As a side note, I believe the regulatory requirement for such frequent statements is in part a dis-service to investors because it focuses more of their their attention on irrelevant short term changes. With the coming of increased performance reporting on statements this year, the risk of focusing on the past instead of the future and important goals will certainly rise, but I digress.

In the last six months we have seen two broad market declines of more than 10%, prompting mountains of news announcing the next apocalypse du jour. As evidence of this, one client recently asked me “Is there is anything we should be doing differently because of the economy?” At this, I realized that either I had failed to properly communicate the nature of investment reality to this client, or else my message had been forgotten over the last few years of complacent gains.  My response was “What about the economy? If you mean the Canadian economy, well, it is currently adjusting to the reality of the wonderful news of lower energy prices, thanks to the ingenuity of the scientists, engineers and entrepreneurs who have discovered ways to create an even more abundant supply of inexpensive, dense and portable energy that we all use to maintain and improve our lives. Since Canada has such a narrow economy with natural resources playing an over-sized role, our economy will be making some major adjustments to this new information. Since your portfolio is globally diversified and since all other industries rely on energy for their existence, low energy prices will be a boon for them and over time will improve their businesses and share prices. Is this what you are worried about?”

You see, the investment markets are the most dynamic, adaptable and vibrant of markets. Due to modern communications (powered by abundant, inexpensive energy), people around the world are able not only to invest in businesses from all over the world, but are able to change their investment choices in an instant – as many of them do – but this is not usually a good thing for them.  When the dust settles on a market cycle, it is the most rational, the most logical, the most long-term thinking of investment managers who earn the best returns, most consistently.  The fact there is an inverse relationship between investment trading activity and results  should not surprise you.  The money managers I recommend most have more than one common characteristic, but an important one is that they spend most of their time thinking, learning, and researching and relatively little of it engaged in directing trades.  They may spend years getting to know a business before buying shares of it, and then may own it for years before replacing it with another business investment idea. This is a deeply unpopular method of investing with the news media and runs deeply contrary to the typical retail investors’ urge to “just do something”  when market prices decline.

It may be of some comfort to know that a couple of the fund managers I most highly recommend have been holding an unusually high amount of cash in your funds since they found attractive share prices harder to find over the past year. They have been patiently waiting for shares to go on sale again so they could buy more when prices are low and others are fearful, which (must it be said?) is two ways of saying the same thing. The truth is that it is during times of market price declines that the most opportunity exists for fund managers and financial advisors like me to add value.

Good fund managers add value by adjusting their investment mix according to where they find the most attractively priced businesses.

Good financial advisors add value by counseling clients to avoid a half dozen or so big mistakes, keeping you focused on lifetime goals and financial plans, spending most of our time on variables we can control.

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