What to expect when you’re excited

With the recent release of the movie “What To Expect When You’re Expecting” that is based on the highly acclaimed book (I saw the movie and it was fun to watch), it seems like a good time to look back on what often happens when investors get carried along by the excitement of a rapid rise in share prices.  Just over  dozen years ago now the business newspaper pages were covered by, the television business news was overflowing with and the business radio reports and shows were dominated by the stories of technology stocks.

I distinctly recall a weekly Ottawa phone-in radio show run by an investment advisor with one of the large brokerage firms.  Part of the show featured interviews with company executives and the rest was largely listeners calling in offering an opinion on a few stocks and asking for the advisor’s opinion of them.  The amazing thing was that for a few years all of the calls and most of the interviews were about technology stocks.  It was evident that listeners were almost entirely focused on one market sector and ignoring the vast majority of investment opportunities.  To these people, diversification meant having some telecom carriers, some software companies, some wireless companies, some hardware manufacturers and maybe a tech mutual fund to round it off.

I clearly remember a client of mine who was in her late 50’s, was a fairly nervous type and who in January 2000 sat at my desk and declared she was considering diversifying her portfolio.  I was surprised since she already owned the Cundill Value Fund, Trimark Fund and a couple of other rationally diversified mutual funds.  In her funds, she owned over 100 business from all over the world and I thought this was quite enough diversification, so I asked her what she had in mind.  “Oh, a couple of blue chip stocks” was her reply.  Since she already owned dozens of companies considered “blue chip” I asked her to be more specific.  “Oh, you know, I was thinking of _____ and ___” she said, naming the two largest tech companies in Canada at the time.  When I told her that I was not able to offer opinions on individual stocks but that the value-style managers handling her mutual funds considered these companies to be high risk investments and did not hold them in her funds, she looked at me kind of funny and did not seem to know what I was talking about.  Fortunately, she never followed through on her idea, which of course would not have added diversification but reduced it and which would not have reduced the risk of her portfolio but increased it.

Another client recently sent me a report from an RRSP held in an account where you can make your own low cost trades.  The account had not done well over the last dozen years and I was asked to transfer it to an RRSP under my supervision. Although I had heard from the client about a couple of investment purchases over the years, I was still surprised to see the report.

There were four technology companies that had lost almost all of their value since they were bought and two index products, one of which was up 22% and the other, an index of technology shares, had lost 41%.  Now, a dozen years ago the Canadian market index was dominated by just two technology companies, so the account really represented a single investment idea – that technology companies at that price level represented good investment value.

In more recent years there have been a few other dominant themes:

• that resource companies were the best (until they weren’t);
• that large US companies were the worst (until they showed great resilience and ability to recover);
• that all stock-based investments should be avoided since the world market is completely mad and you can’t trust anything;
• that true safety is found in owning long-term government bonds having ten year interest rates below 2% and lower than inflation.

None of these ideas made or make any sense except for short-term speculators and so I recommend you studiously avoid getting swallowed up by them.  That way, you can avoid having a statement that looks like the one I saw.