In a land far away a long time ago, a monk wanted a cigarette. He approached the monastery’s Abbot asking, “Abbot, while I am praying, is it ok if I smoke?” The Abbot replied, “No my dear monk, praying is a sacred act, so you should not smoke while praying.” A week later the monk returned to the Abbot, asking this time, “Abbot, while I smoke, is it ok if I pray?” The Abbot replied, “Yes, God always welcomes prayer.”
In many aspects of life, success is only a matter of holding the right perspective.
A simple look at Toronto real estate, bank stocks, and index-tracking funds/ETFs (all three deeply intertwined), illustrates just how many people are looking for something to be excited about. Enthusiasm is in high demand and high demand equals high prices. And yet we know that anyone who arranges their investments to maximize enthusiasm ends up disappointed in the long run – enthusiasm for high prices doesn’t make for high returns. Instead, a perspective towards endurance is far more likely to accrue long term gain. But while enthusiasm is commonplace, endurance is rare.
With that in mind, a good defense is a good offense. As you read in the March note, Canadian banks are expensive based on their economic fundamentals and comparisons over the past twenty years. Tech stocks and materials companies are up there too. Where are risk-conscious investors to turn?
The good news is that while the “enthusiasm stocks” are through the roof, endurance stocks are the cheapest they’ve been in a decade. These are the defensive sectors, named so because they are less dependent on economic cycles and the mercurial whims of capitalist fancy.
Within the consumer staples, consumer discretionary, retail, energy (now that earnings are coming back up), and healthcare sectors I’m seeing some companies trading at valuations comparable to the lows of 2008. The strange thing is these companies are doing everything right -- growing income, growing cashflow, growing book value, and growing sales. Yet many investors are too busy building castles in the sky to notice these diamonds in the dirt.
Perhaps the preoccupation with “banks never go down” or “Trump trade” will last forever and our defensive stocks will stay forever low. Or more reasonably, it seems far more likely that investors will readjust expectations for growth in the real economy. Common sense always has a way of creeping back in after asset prices move too far out.
To take advantage of the current polarity in prices we see three avenues to success. Over the next while we plan to 1) take profits on companies successfully meeting our estimates of fair value, 2) raise cash to reduce general risk, and 3) add defensive companies priced well below fair value.
Company-specific notes and target estimates are available for clients only.
Views from Toronto’s Real Estate Expo: http://torontolife.com/real-estate/think-going-go-even-sky-high-wealth-expo-attendees-talk-torontos-housing-market/
Two great investors share this in common: https://www.forbes.com/sites/antoinegara/2017/03/16/from-equities-to-bonds-howard-marks-and-joel-greenblatt-preach-the-gospel-of-patience/#67f9df5262a3
Seven things good investors do well: http://jimoshaughnessy.tumblr.com/post/158366040139/successful-active-stock-investing-is-hard-here
“Become more humble as the market goes your way”: http://awealthofcommonsense.com/2017/03/how-bull-markets-affect-your-intelligence/
As always, please let me know if you’d like to chat about financial planning, long term investing, and other investment opportunities.
Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Altus Securities Inc.
55 Yonge Street, Suite 1100