Tag Archives: investing

Investing is not a game

LowrieFinancial/Unsplash: michal-parzuchowski

By Steve Lowrie, CFA

Special to the Financial Independence Hub

“You can’t invest without trading, but you can trade without investing. … [T]hinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other.” — Jason Zweig

Are you out of breath trying to keep up with the breaking news about GameStop and all the other red-hot trades o’ the day? Here’s a synopsis (to date), and what it means to you as an investor:

Seemingly Unstoppable Games

During the last week of January, a perfect storm of traders converged on the market, propelling the prices of a few previously sleepy stocks into the stratosphere.  Jason Zweig of The Wall Street Journal reported, “From Jan. 25 through Jan. 29, a ragtag army of individuals sent shares in GameStop Corp. up 500%, and sent many others skyrocketing too.”

Reddit Gone Wild

Interestingly, there was no huge, breaking news or major shift in these companies’ fundamentals to explain the surge.  Instead, a tidal wave of trading momentum happened to form on a Reddit forum called WallStreetBets.

Big Short-Sellers Get Squeezed

Whatever inspired the movement, it soon became a force of its own, like an online flash mob buying and holding shares at increasingly higher prices.  Why would anyone do this?  Many may have just gotten caught up in the excitement.

Short-selling involves borrowing a company’s shares from someone else, selling them, and then hoping the price goes down so you can buy them back at a lower price.  You then return the shares to the lender, while pocketing the difference.  If you pay more to buy the shares to settle your debt, you have lost money.  The risk of short-selling is that the maximum profit you can make is 100% (if the shorted stock goes to $0); however, the potential loss can be many times your original investment.  (Theoretically, your potential loss is unlimited if the share price keeps going up.)

If the price shoots upward, short-sellers can face margin calls, requiring them to cough up the difference between the original share value and the fast-soaring price.  Or worse, lenders can demand their borrowed shares back, forcing the short-seller to either find another borrower or buy back the shares in the open market at whatever price they can get.  In the case of GameStop, short-sellers like Melvin Capital Management lost billions of dollars meeting margin calls, which in turn became chum to the feeding frenzy.

Main Street vs Wall Street (David vs Goliath)

In typical fashion, the financial mainstream media has pitted this as some sort of epic battle between thousands of small, individual investors just trying to make a buck vs. the Wall Street/hedge fund fat cats backed up by some sort of rigged system.  Don’t kid yourself.  There were pros and sophisticated traders on both sides of this.  No novice is going to have the knowledge to orchestrate not only a short-squeeze, but an option-based gamma-squeeze on a heavily researched deep fundamental value stock.  At least not without a little help.

Robinhood Parries

As the frenzy continued, many U.S. retail trading platforms – including Robinhood, Schwab, TD Ameritrade, and others – started experiencing trading overloads.  Technical glitches, as well as deliberate trading restrictions, ensued.  Not surprisingly, traders impacted by the lapses and restrictions have cried foul, perhaps rightfully so.

Enter the Regulators

Is the phenomenon just a new, but a legal variation of a very old market mania theme?  Did anyone actually violate existing regulations, and if so, whom?  Are new regulations warranted?  Securities regulators are considering these questions, not yet resolved.

Now, to the main point.  Where does this leave YOU as an investor?

You may have noticed:   Continue Reading…

Investing themes in a post-Covid world

By Aman Raina, SageInvestors.ca

Special to the Financial Independence Hub

Update from Author:
Since I posted this in the early days of the pandemic, it’s been quite interesting to see how some of these mind maps have played out. Global supply chains are more stressed creating bottlenecks and driving prices up.  Alternative payment mechanisms and digital currencies are becoming more embraced. The exodus to suburbs has been joined. Curb-side pickup  and other retail distribution channels are being more accepted. There have been struggles in how we educate our kids and social media thanks to the ramblings of a Mad King have now come under the eye of regulatory bodies around the world. Many mechanisms will need to be refined. Even though we’re closer to getting to the other side of the pandemic, many seismic shifts I describe are still in the early days of playing out and as they evolve, investing opportunities will also emerge.  

 

The COVID pandemic has become the seminal moment in our lives. As of this writing, we are still well into growth phase of the virus but there are signs that the spread may be flattening out. The literal full-stop of our daily lives, socially, economically, and psychologically will be embedded in how we approach how we live, work, trade and invest much in the same way the Depression of the 30’s and the two world wars shaped the people of those generations.

What’s different is those periods were man-made. This episode has been driven by a virus introduced by Mother Nature. Unlike our parents and grand-parents, we are not hunkering in a bunker covering our ears while our countries get bombed or are being drafted to carry a gun and lie in rat infested bunker. We are isolating at home watching Netflix, baking bread, and washing our hands every 30 minutes. It’s different but I feel the impacts could be the same.

The COVID period like the Depression will also shape how we approach investing. Many research studies have delved into the investing behaviour of people living through the 30’s and 40’s and how much it shaped their decision-making and risk tolerances. The generations that are living through this period will have developed a value system, and biases that will shape their attitude, confidence, and ultimately how successful they will be as investors. We are seeing literally millions of people who have lost their jobs and livelihoods overnight. Their approaches to saving and investing will not be the same.

I’ve been thinking about how the events we are living through right now are going to influence our behaviours going forward and trying to map to how society and business will respond, adapt and subsequently mind map out possible new investing themes that could emerge. I haven’t tried to identify specific companies or stocks. In fact some companies probably don’t even exist right now. Times of stress can be viewed as opportunities. In between home schooling my kids, and answering many questions from worried people about how to manage their shell-shocked portfolios, I took a shot and put together some preliminary ideas and mind maps that may trigger some ideas to consider.

We’re not in charge

If isn’t clear now, it should be … we’re not in charge.

Up until now, the narrative regarding our earth and environment has been very superficial and revolved around the premise that the planet is getting hotter and altering our environment in profound ways. There has been an ideological debate about how valid this is. We’ve been conditioned to think that climate change is associated with extreme weather events such as hurricanes, flooding, tsunamis or mass earthquakes that level cities or bleaching of coral reefs. The other narrative that we have overlooked is at the molecular level which as we are discovering that while not as dramatic cinematically (Contagion movies not withstanding) viruses can be just as devastating. These debates are revolved on the premise that we as human beings are in charge and will dictate the rules of engagement with the planet. The planet will do what we tell it.

This is false.

What is incredibly clear is we as humans are not in charge of this narrative. The earth is … and the earth is not happy with us.  It has watched as we fumble and delay and make excuses back and forth about respecting the planet. It has watched as we put a priority over material wealth, living vicariously through Kardashiean and Justin Beiber instagram posts and immediate gratification at the cost of the health of the planet. The earth has sat there politely and taken the abuse we have unleashed upon it.

The earth has had enough of all this. It has decided to give us a timeout and sent us to our homes to isolate and think about we have done.

We’re not in charge. The earth is in charge and if we want to live happy lives, we need to respect the earth. It has called a time-out on us. It is telling us the status quo is unacceptable and that we better get our sh$t together … now. Whatever attempt we have initiated to respect the planet have been superficial and full of platitudes.

Wall Street, Bay Street, Governments of all shapes and stripes are working under a narrative that once a vaccine is created, we’ll get our injections and go back “normal.” The stock market is pricing in this narrative. I think it’s completely wrong.

It’s going to cost us in so many ways …. and it’s going to make us better in so many ways.

Whatever happens, I’m convinced that whatever comes out of this event will be inflationary in the long-term. Everything is going to cost more and it’s going to take longer. The days of being spoiled with low cost of goods made in China, India, and wherever have ended. To live and function under this paradigm will require complete rethinks on how we will exist while respecting our planet and will require significant investment and behavioural changes.   If we can identify these new paradigms then as investors we can participate and profit from these new paradigms. The core performance metric for investment decisions is making decisions that protect our purchasing power of our savings. We need to grow our savings to insulate us so we can afford the necessities we need in our older years to survive. Owning GIC’s won’t cut it. Heck we’re entering a world of negative interest rates! We will need to invest in people, ideas, goods and services. As investors we need to consider what these opportunities will look like in a post-COVID world.

The Earth is breathing better

During this time, as I walked around my neighborhood or went on what has become my more frequent jogs, I noticed how much more quiet the neighbourhood has been. The air has also felt crisper and cleaner. There seems to be less smog in the air. I thought it was just me but apparently in many parts of the world, air quality has dramatically improved as a result of the idling of the economies. For the first time in decades people in India can see the Himalayas, The traffic is quieter and I can drive to downtown in 5 minutes when it normally took 45 minutes. Who would have thought that a virus would create so much beauty in the world.

I don’t know about you but I like this and I suspect that we like this new arrangement and will want to keep it that way as much as possible.

Climate friendly products and services are now a default, not a theoretical concept. We’ve seen the proof of concept and we will want this be the status quo going forward, costs be damned.

It’s funny to watch OPEC countries trying to agree on cutting production as a result of the pandemic. It’s ironic that reduction at some point has a better chance of being permanent. Some of them are aware of it, most notably Saudi Arabia. All the arguing about oil prices is useless. They know the jig is up now. Coal, forget it. We could see a big push into electrical vehicles and solar based/geothermal forms of energy. There could be more willingness to invest in the infrastructure around it now.

Post COVID Theme – How we trade: Globalization gets re-calibrated

We have become dependent on sourcing goods from a few countries or from one part of the world. COVID has shown how risky this is. I suspect we will see a recalibration of how our goods and materials get sourced. Supply chains will become regionalized/localized. Congratulations Mr. Trump, you’re getting what you asked for, just realize that the cost of doing business will go up. With COVID, we may be more comfortable with the concept now. I expect we will be flattening our supply chains.

Post COVID Theme – How we wait: Reacquainting ourselves with time

 COVID introduced or reintroduced us to the most precious and finite natural resource we have…time. When we have time, we think, we relate, we reset, we prioritize and we appreciate what is truly important during our finite personal existence. We reacquainted ourselves with reading, playing board games, talking and sleeping. During this time, I’ve been running 2-3 times per week compared to barely once a week pre-COVID. I’m getting more sleep now, almost 9 hours versus 6, and I’m feeing totally different, more at peace and not in a rush. I like it. I’m loosing weight! Continue Reading…

Stickhandling your investing amid fear and greed

“The fishing was good; it was the catching that was bad.”
— A.K. Best, fishing author.

“Stock markets are swimming in the face of two major investor emotions. They are fear and greed.” — Adrian Mastracci, fiduciary portfolio manager.

All you have to do is rewind to the 2020 investment results. Especially those recorded during the months of February, March and April. They brought new meaning to volatility, in both directions.

Mention 2020 and practically every investor is glad it is in the rear view mirror. Tread carefully as those pesky markets are not known to march to your wishes.

Accordingly, I attempt to highlight some basic ideas that help in portfolio construction. Focus on expanding your knowledge, say of at least three strategies that improve your nest egg.

Each day now brings a new crowd of market optimists and pessimists. Along with various assortments of buyers and sellers. Just playback the last two weeks.

Be aware of the implications in both camps. Successful investing is about stickhandling one’s comfort zone between fear and greed.

Rules to live by

So, rule number one. No knee-jerk reactions please. Regardless of whether you’re buying or selling.

Rule number two. Markets operate on logic. Do you?

If you succeeded with these two rules, step aside and breathe. If not, rewind to rule one. The bigger question is why would you want to?

Some investors may seek to calm their fears by preserving capital. Others prefer to chase their greed by hitching onto growth wagons du jour.

A few more pessimistic data releases could drive the markets lower. Conversely, a few more ounces of optimism could propel investor confidence to higher levels. Continue Reading…

The pros and cons of RRSPs: What you need to know

By Allan Small

Special to the Financial Independence Hub

If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?

The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.

Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:

Pros

  • Contributions are tax deductible.
  • Earnings grow tax-sheltered within the plan.
  • You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
  • RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.

Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.

All of this said, RRSPs do have their drawbacks.

Cons

  • While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
  • The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.

RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…

The Long View: Follow the Herd?

By Jeffrey Schulze, CFA, Director, Investment Strategist with ClearBridge Investments, a Specialty Investment Manager of Franklin Templeton

(Sponsor Content)

There are times to follow the herd and there are times to stray away from the pack. Investors must learn this lesson. Sometimes, it can be beneficial to follow a larger group, but there are moments when it can make sense to chart one’s own course. In the early and middle stages of an economic expansion, running with the herd can be a beneficial and safe proposition.

As the U.S. recovery unfolds, some investors may be tempted to break off, worried about the formation of a bubble. Indeed, many investors are concerned that the market may be overheating, based on metrics such as the forward earnings of the S&P 500 Index.

Importantly, an increase in equity multiples is not uncommon during the early stages of an economic expansion. Following recessionary troughs, market returns tend to be driven by price-to-earnings (P/E) multiples during the initial market rally (approximately nine months) as investors anticipate an eventual earnings rebound. As the recovery matures over the subsequent two years, the opposite dynamic occurs, with multiple compressions on the back of stronger earnings growth. Put differently, earnings typically make a significant contribution toward stock returns during this second phase of the rally and declining P/Es become a modest drag on returns (see Exhibit 1 below).

Exhibit 1: Multiples vs. Earnings Data as of Dec. 31, 2020. Source: JP Morgan.

As we move through 2021 and eventually into 2022, we expect this same pattern to unfold; however, multiples may remain elevated.

Higher multiples not uncommon early in Expansion

Valuations are elevated in part because investors correctly sniffed out the budding U.S. economic recovery. Unprecedented stimulus actions (both monetary and fiscal) short-circuited the typical bottoming process, as policymakers formulated a response that rapidly ended the economic crisis and fueled an upturn in financial markets.

ClearBridge Investments has been tracking the scope of this improvement, and we see an overall expansionary green signal since the end of the second quarter of 2020. In our view, it has become clear that a durable U.S. economic and market bottom has formed, with the S&P 500 up 67.9% from the lows and a third-quarter GDP rebound of +33.4%, as of December 2020. Continue Reading…