My two most recent letters addressed the “epidemic” markets with impact of Covid-19 for both health and finance. In many instances the biggest health issue is the heart-rending worry prompted by such a deluge of desperate news, such as has prompted chaos in the aisles for toilet paper and bottled water. What one really needs is a decent store of cereals, legumes, and frozen/canned meats and vegetables, along with careful continuous hygiene and avoiding crowds. Many can carry this virus symptom-free to infect others with weaker immune systems. The word is hygiene.
What is proper hygiene for investments and wider markets? Today’s indexes are down 10% while already down 20% at yesterday’s close. Normally our portfolio risk is near half of market fluctuation … or even just a quarter or so, when markets are in freefall. Now is different. Best way to understand this is in terms of discriminate versus indiscriminate selling. Picture this: in 1930 Jane Doe was on the edge of bankruptcy and she sold the family car; she did not sell the family toilet or kitchen sink. Selling the car was a choice so in this sense she “discriminated” in what she would sell. It would have been indiscriminate selling to dump the sink, the toilet, or the family dog: that would have been desperation, capitulation, near-death financially, and in fact useless. She simply would not sell those.
So what’s happening this week? People around the world are selling prime assets at 20%, 30% discount and also losing the immense income those assets keep paying. But our portfolio managers (PMs) don’t act that way. Earlier in the crisis they lightened up on assets that would be hit harder as the virus continued to unfold around the world. If they had cruise lines they sold that. If they had airlines they dropped those. They did not however drop airports because people will travel again. They did not drop railways because grains and goods will continue to be move from producers to consumers. And while a world in panic sells the sink and the family dog (banks for instance) our PMs are buying on-sale right now getting banks at 20% discount and paying near 6% dividends … nearly unheard of except at times like these.
- As portfolio managers have reduced risk this season, this is “discriminate” selling and a clear choice to reduce risk and preserve wealth and income.
- As the unguided public indiscriminately sells at 20-30% discount our PMs increase ownership of secure assets and strengthen dividend yields.
Canadian and foreign governments are outlining relief and support for health care and financial markets. Many such initiatives are new, because they say such a viral pandemic has never happened before … and I suppose that’s true because our health systems of 2020 are vastly more powerful than in 1918-1920. A challenge involves balancing attention to pandemic solutions which can delay economic recovery, versus speedier financial market recovery which has hazards to public health. Yes we’re starting to get announcements targeting not only C-19 but also the burden hitting businesses of all sorts.
You’ll want to know: markets rise before solutions are fully in sight. This is pretty-much a Law. Financial markets rise before other indicators of recovery. As we own preferred assets our recovery is assured. Two pictures with this letter illustrate this. What we have right now is a couple of months of on-and-off volatility not unlike picture 1 above in “Life of a Fund”. The graph here (much clearer in my 2013 book “Lifetime of Wealth”) shows what will follow: growth into a new bull market that is being born here as we speak.
Reach me with any questions, and connect us with anyone who needs help to secure financial goals, lifelong comfort, and a rewarding retirement. Share this letter with anyone who can benefit.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
** 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. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. 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 consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.