January 2016 SWM Letter

It takes longer to share our thoughts at the opening of a new year, and especially when the news media are so hyped up on fears.  Like media who said China’s exports would fall 8% last quarter but the results dropped only 1.4%.  Or the end-of-the-world forecasters who see China’s shrinking as an all-consuming black-hole … while our partners’ research supports China growing +/- 6% with the service sector rising near 17%/year.  Fears are overblown.  Markets are oversold.  And the absurdity shows in Canadian bank shares lagging ~20% on the fear of oil, though energy is but 2% of lenders exposure and 0.4% of potential delinquency.  Not to bore you with volumes of new-year analysis from our research partners but I’m absolutely certain the sky will stay where it is through 2016 and 2017.

2015 News – Falling Cats and Dogs.

Pic _ Cat in FREE FALLFrom the highest point last April our Canadian market dropped 20% and cleared out Dec 31st by taking >10% of peoples’ savings …with more scary projections going into the new year 2016.  That’s what the news media have been selling because fear sells advertising.

But what actually happened for us in 2015?    Global dividends gained fairly strongly.  Infrastructure and Real Estate were positive.  Fixed-income was modest domestically, positive globally.  Our results were strongly favourable in comparison to the stock market …and this is because we don’t invest in the stock markets, we invest in specific “mandates” that offer a safer, smoother journey with higher risk-adjusted returns.

2015 again proved how to ensure life-income and lasting wealth through “mandates” rather than markets.

Today’s letter is best seen as a group discussion or at least a two-way dialogue because you’re going to have some specific thoughts about this letter.  So I'm relying on you to get back to me with your thoughts, yes and also discuss such ideas among friends if you wish because we can open the forum to people who have been scared out of their wits by news media or other fateful voices.

Do you want Normal Returns?   What are they?  How do you get them?

“Normal” would best be described within a range.  Can I ask you, What do YOU think is a normal return?  Would you say 3?  ..5%?  In the 1990s you might have said 12%?

Bartolotti in “What are normal stock market returns?” (2012) used 6%-11% as his normal-range.  That seems a bit high but even so there’s something here you could find quite surprising.  Only 5 years in his study from 1970 onwards fit as being “normal”.  59% of the years offered greater returns, 29% gave lower returns.  So despite highs and lows, and end-of-the-world stock-forecasts,  7 out of 10 years were offering 6% or higher returns.  Not so scary if a losing year is compensated by the year or two on either side.

So let’s narrow the range of “normal” and use 4% to 8%.  In this case only 3 years out of 40 were normal, and 28 years were strongly above normal.  More than 7 out of 10 years paid normal or above-normal returns.

Bartolotti’s thesis therefore is that people can invest in stocks and do nothing at all, ignore all the news and dispel all the fears, and still make a sizable gain 70 or 75% of the time.  They’ll live longer and happier without dwelling on hare-brained forecasts and news reports.  And their money will generally serve them well, aside from the five years (out of 40) that dropped double-digits (which I suppose is the end-of-the-world scenario).

But we decided on BETTER-THAN NORMAL!

We didn’t sit on the couch and park your money in the stock market.  We defined and delivered certain “mandates” that reward better than the market by offering stronger returns at lower risk.  This is a mammoth statement and not to be taken for granted.  I’m breaking the creed that one cannot outperform the market.  So listen carefully and ponder what we’ve been discussing these years ….that if we build a globally-defined approach to dividends, real estate, infrastructure, and fixed-income, we will cut stock-market-risks to a fraction, while yielding higher income and often stronger returns than the stock market itself.

Your portfolio doesn’t look like the stock market, does it!  And you didn’t lose 11% last year, did you?  Not even half.  Look at your account values for example if they’re down 2% or 4% …or if they were even up a tad, and compare that to the 24/7/365 dose of misery in the airwaves and newspapers!

There are definitely client accounts I want to re-balance this season, but stock losses are not part of this discussion.  I’ll be focused on how to continue matching your portfolio to your income and whether you’re still paying into your investments or whether you’re drawing money out for life-income.  We’ll look at tax-planning for a dollar saved from tax is still in your own pocket.  We keep focusing to reduce risk, enhance yield, and since the opportunity has arisen I’m looking at how and when to increase your exposure to healthy sectors that were beaten up in the year gone by.  (Not yet oil, but financials would fit here.)

I’ve shared before that only 18% of stock-market months show growth yet 75% of years grew >4% and 87% of years are positive.   It’s the short-term news that kills confidence in the stock market.  TIME Magazine covers are evidence here:  Dec. 1984, “Awash in Troubles”.  Nov. 1985 “The Crash”.  Nov 1990 “High Anxiety”.  Jan 1992 “How Bad Is It?”  Sept 1992 “The Economy, Is There Light at the End of the Tunnel?” 

So tell me, what news media focus on long term results?  None!  By the time today’s paper is written, or this week’s Economist, or this month’s Investment Digest, the news contained is almost immediately out of date.  One of the smarter notes I’ve seen this season came from Great West Life where a spokesman correctly said, “New year forecasts should generally be dismissed, largely because they are usually wrong.”   

For further guidance on forecasting (from anyone, anywhere) see the stock-market chart in my September SWM Letter as we don’t forecast events or returns, but demonstrate how investments will broadly rise within upper/lower limits over time …and at the moment we happen to be at the bottom-line of that channel.  This offers a positive view of equities in general and a clear advantage of staying focused on equity-income mandates supporting Lifelong Income.

Can an Owner avoid the Down Years?

I occasionally share that you wouldn’t own a commercial office building or toll-bridge and suddenly decide to dump such assets because of poor world news.  No, you keep owning the property, drawing income, and ignore seasonal markets because income-growth is going to drive that property value higher.  This is what’s driven up bank stocks over the past decade.  It’s why infrastructure investments are becoming a true mandate in our Canadian Pension Plan holdings.  It’s why real estate investments can outperform stocks because people just keep holding the property and building their income.  It works most years …and even when it doesn’t it still works …next year!  And that’s the story of Life Income Mandates.  They don’t go out of style …they keep serving by reducing risk, supporting income, and lifting future capital values.

John Heinzl recently said the same thing in these words:  “Imagine you own a small business.  You have good years and bad years …but sales and profit are generally rising and you’re drawing a growing salary.  Would you wake up every day wondering what the market price of your business is?  Would you constantly think about selling your business…?  Probably not, but that’s how many investors treat their portfolio. …  A trading mentality leads people to sell perfectly good businesses at the first whiff of trouble. ... In fact (such times) can often be good buying opportunities.”

Crystal Ball?

It’s tickling to suppose we could crystal-ball the stock markets.  They’ll go up this year, or down, and how far!  Such knowledge could make a person rich.  But fortune tellers are not rich, and news broadcasters are not very rich, and even most people in financial markets are 3 months disaster away from starving poverty.  So all the noise we hear isn’t because someone has a forecast to make you rich but because they want you to buy or sell a product that keeps food on their table.

Poor years increase returns in following years.

Back to Bartolotti or any web-based study of the annual sequence of returns.  I’m using his annual average international return calculations since 1970.  1974 dropped 25% but 1975 rose 33% and heralded six years of substantial growth.  1990 dropped 13% followed by 18% growth in 1991 and nine years significant gains.  2001-2002 dropped and led to four years of gains.  2008 provided the greatest financial meltdown in two centuries and our investments have grown (pockets of pain and pleasure) since that time.  2015’s drop, among other factors, suggests sizable rewards are at hand for us in 2016-2017-2018.

Special on Emerging and Frontier Markets.

I cannot put this any better than Mark Mobius of Franklin Templeton and urge you to follow this link to his new year focus on the discussion of developing markets of the Americas, Asia, Africa and Europe.   A rising US dollar tends to pull money out of these other markets, yet the opportunity to invest in specific sectors and companies of a select group of these countries will leverage our long term growth.

It’s too widely assumed that EM/FM markets are high risk, but compared to the developed world their growth is 3-fold, their age is half, and their diversification far exceeds Canada.  Their risk ratio (as measured by P/E) is far lower at 12 for EM,  10 for FM,  compared to 18 broadly in the developed world.  And it’s worth noting EM/FM fell on miserable news last year, only -7% compared to Canada’s -11%.   We don’t stock up on EM/FM markets but 7.5 – 10% allocation to these economies offers some mega-returns on occasion and adds to the healthy growth we want to enjoy over time.

Moving ahead in 2016.

In life as always, a year can bring the best of times, the worst of times.  May you experience strength and health, purpose and prosperity, love and friendship each and every day.  TV and newspapers are a window to see and hear the worries that are troubling people world-wide …troubles that largely we have avoided for ourselves.  It’s an opportunity to gratefully ponder our good fortune and responsibility in a world of great need and make an impact for good that will touch others’ lives.  If anything in the world news has been worrying you, consider googling “Life of Significance” for a wide array of opportunities to see the world and life itself in a new light and colour.  Our investments are safe;  if they’re down they’re about to rebound;  life is good!  Now how will we turn our talents and skills to enjoying and sharing the best that each day has to offer for 2016 and beyond!

Yours in Financial Security for LIFE!


Brian Weatherdon, MA. CFP. CLU. CPCA. CRC. MDRT.  905-637-3500 x 223
627 Guelph Line, Burlington, Ontario. L7R 3M7.   1-877-937-3500 FREE x 223
Ret.Coach SEALAmazon (2013): “A Lifetime Of Wealth — And How Not To Lose It.”
Amazon (2015):   Your Business, Your Retirement: Halton Retirement Study.
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media. Research is sourced from leading sources including GLC, RBC, CIBC, Franklin Templeton, Mackenzie, and a wide range of highly reputed firms. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals. We are grateful always to receive your comments and questions.


  1. “You don’t have to do many things right to be a great investor. But the few things you must get right are critical.

    “At the top of that list of things you must get right is your behavior during bear markets. Because here’s the truth: You can be the best stock picker in the world, capable of finding tomorrow’s winning businesses before anyone else. But if you let your emotions get to you and sell stocks when a bear market arrives, none of it will matter. You will fail at building long-term wealth. …

    “If you’re a forward-looking investor, the historical evidence is overwhelming: The future is brightest when stocks have plunged, and vice versa. The beauty of bear markets is they raise the odds that future investment returns will be both positive and high. …

    “I looked at monthly market data going back to 1871, which includes all kinds of nasty events — world wars, Great Depressions, recessions, stock panics, flu pandemics, you name it. From 1871 to 2009 the odds that the S&P 500 will be higher five years in the future — adjusted for dividends and accounting for inflation — are 80%. That is, if you own stocks today, there’s been an 80% chance of having more money five years from now. But if stocks have just suffered a decline, the odds of earning a positive return in the subsequent five years go up. And the larger the decline, the higher the odds of earning a positive return in the future. …

    “One of the hardest investing concepts to come to terms with is that high future performance begins during periods of low current performance. It’s hard to come to terms with because it’s counterintuitive. People like to extrapolate the recent past into the indefinite future. When stocks are doing poorly, they assume they’ll keep doing poorly in the future. But history is clear as day: The exact opposite is true.

    “This is why investors who sell during bear markets do so much damage to their long-term wealth. Not only do they sell when prices are low, but they sell when the odds are highest that future returns will be great. It’s a double-whammy. …

    “Every investor wants to be in the game when future returns will be high. Those odds go up — way up — when it’s most tempting to get out. Once you realize what bear markets really are they become beautiful things.”

  2. Further on the fallacy of “Normal” … the need and opportunity to push beyond for extraordinary results: http://www.thestar.com/news/insight/2016/01/16/when-us-air-force-discovered-the-flaw-of-averages.html

  3. In an article titled, “Worried? Think like a Pension Fund” Guy Dixon offers:
    “Investors should concern themselves less with market turbulence and instead focus on an asset mix that will fulfill their future income needs.” This is exactly where we continue to focus with “Life Income Mandates” …
    Dixon’s full article is at: https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20160127/SRRRSPRETIREOUTLOOK

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