Getting closer to investors was one of the benefits I experienced when I started 5i Research Inc. after being a portfolio manager. A portfolio manager tends to deal exclusively with investment advisers who sell your funds. Individual investors deal with the adviser, so it was rare in my earlier career to directly deal with those…
Getting closer to investors was one of the benefits I experienced when I started 5i Research Inc. after being a portfolio manager. A portfolio manager tends to deal exclusively with investment advisers who sell your funds. Individual investors deal with the adviser, so it was rare in my earlier career to directly deal with those whose money I was managing.
This dynamic was good and bad. Good in the sense that one had an extra level of protection from clients when markets were weak. The investment advisers dealt with client concerns and worries when I had a rough time in my fund, or markets were volatile. But it was bad in the sense that one was always dealing with advisers. I rarely got the sense of panic or euphoria that clients were experiencing in the market, because the brokers filtered out all the emotions before they got to me.
It is all different at 5i Research. We deal directly with clients, so we hear about it when our investors are nervous, whether it’s about a Trump tweet, trade war volley or missed earnings report. We have answered nearly 100,000 investor questions since we started in 2012.
It doesn’t always go smoothly. Even with four decades of experience, we can, of course, be just as wrong as other market participants at times. Small and mid-cap growth companies, which we tend to lean towards in our analysis, hardly ever give investors a nice, smooth ride. Sometimes, investors need to focus on the bigger picture with their investments. Here are five examples of issues where investors should have focused their worries on something else.
You are going to have some losing stocks
We provide model portfolios for investors to follow, and we have a specific growth-focused portfolio, which is up 26 per cent this year. But the portfolio still has several stocks that have not done well at all. A couple have declined 50 per cent or more. Investors tend to focus their concerns on these. But it is the total return in a portfolio that matters. The influence on returns of a few big winners completely swamps the losses on the losers. A stock up 1,000 per cent, which we have had in the portfolio, can make up for a lot of mistakes. Focusing on just the mistakes distracts investors from taking a portfolio approach. If you don’t have some losing positions, you probably are going to get mediocre returns. Risk is part of the investment game.
Don’t try to predict the next hot trend
Every investor, it seems, is now loading up on gold stocks as interest rates decline. Two years ago, everyone was loading up on cannabis stocks. Next month, there will be a new focus. We propose instead that you just stay diversified. Don’t try to predict which sector is going to run next. Own most sectors, reduce your portfolio volatility, pay less in taxes and enjoy the ride.
Quarterly reports are really not that important
Clients like to worry about whether a company beat or missed expectations. But say you have a 10-year time frame, and you really should for many stocks, especially smaller companies. Looking at one quarter means you are focusing all your stress on a 90-day window within an investing time frame of 3,650 days or so. Investors tend to react to recent news rather than looking at longer trends. Some of our best-performing names, such as Constellation Software Inc., hardly ever beat analyst earnings estimates.
You don’t have to go to cash
Clients these days are extremely focused on the inverted yield curve and the looming giant recession, which everyone seems to agree is just around the corner. Every day we get a few (or more) questions from investors about whether they should go to cash to protect their portfolio. We have to remind clients that we are not the Amazing Kreskin and cannot predict the future, and neither can anyone else (including Kreskin). But it doesn’t even matter. Recessions come and go, and still the market churns higher. Sure, the 2008 crisis was a bad recession, but it’s been over for 10 years and investors who didn’t panic have done very well. Almost all of the really good days in the market have followed some of the worst days.
Going to cash means you might pay taxes and you might miss big gains. Yes, you might miss some big short-term losses as well, but what are you going to do by going to cash? Are you going to re-spend your cash with perfect timing? (No, you are not.) Are you going to have the guts to buy as the market plunges? (History says no.) Every single stock you have ever bought and made money on was sold to you by someone who didn’t think it was good at the time of the trade, or that the market was about to decline. Remember this when you want to sell, and remember that the investor on the other side of the trade is not half as concerned as you are, considering that they are buying.
Stocks do not have to go up, or down
We have been suggesting minimal investment in the energy sector for years now, but investors still gravitate towards the sector because it is a large part of the S&P/TSX index. If we look back on prior customer questions over the years, though, a theme develops: The energy sector has been beaten up so badly, surely it is due for a big rally now? Are there any energy producers stocks you can recommend? There are always interesting stocks, but just because a sector has been crushed doesn’t mean it is due to recover. Stocks don’t know where they have been; they don’t care what you paid for them. We note that some of the questions expecting a big rally in the energy sector were from four years ago. That is a long time to wait for a rally, and the energy sector has been nothing but pain since.
The same thing applies with stocks and sectors where investors believe a decline is long overdue. Take Shopify Inc. Investors have considered its stock to be massively overvalued and due for a correction ever since it was about $80 per share. Today, it is $525. Be careful with assumptions. Just because a stock is up a lot does not mean it is going to reverse. And a stock down 50 per cent is usually far more likely to decline another 50 per cent than double to get back to its prior price.
Peter Hodson, CFA, is founder and head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (https://www.5iresearch.ca).