March 2018 Update

We continue to maintain a defensive position across our portfolios. We are holding a larger than usual amount of cash, government bonds, and commodity producers, with a reduced exposure to equities.

Warren Buffett’s company Berkshire Hathaway released their annual shareholder letter last weekend to the delight of many value investors. Buffett mentioned that he was a net buyer of securities throughout the year, but expressed a cautious tone about today’s valuations. I agree with his perspective that while there are many well run companies, their trading prices are generally too high to ensure an adequate margin of safety. In other words, higher prices have increased risk. At present, Berkshire’s portfolio is invested about $191 Billion in stocks and $116 Billion in cash, a roughly similar composition to our Growth Portfolio’s 30% cash position. And like Buffett, I too await lower prices so we can make lower risk purchases.

As illustrated in the graph below, stock prices relative to earnings match levels seen only before the Great Crash of 1929 and the DotCom Crash of 2001. With nine years since the last major downcycle in stocks, it bears reminding that all markets are cyclical, and sticking to defensive principles is the only way to win the long game. In the short run when prices are elevated as they are today, that means we underperform because we will not do the risky things everyone else believes are normal. In the long run, it means we survive and protect capital.

In early February we saw the first signs of a large (and anticipated) increase in market volatility. Investors should remember that the market is here to serve us, not guide us. Often times market prices over and under-react to various news items, and we will take advantage of that volatility to buy companies with strong operations and valuable assets at a cheap price. Just because someone is willing to sell us a share of a business at a low price doesn’t necessarily mean that’s what the share is actually worth to a more prudent long term buyer. We should be quite happy to see more volatility, because it allows us to deploy our cash into bargain purchases, investing for the long term.

Interesting links

More of today’s best investors raising cash: http://business.financialpost.com/news/fp-street/brookfield-selling-assets-to-build-war-chest-for-next-downturn

Investor discipline and sticking to your style: http://mebfaber.com/2016/01/05/how-to-beat-98-of-all-mutual-funds/

Stop reading the news: https://www.fs.blog/2013/12/stop-reading-news/

Natural gas bull market: https://latest.13d.com/natural-gas-longest-bear-markets-greatest-over-supply-always-leads-long-bull-markets-2a5e8e85f1ad

Toronto is not even close to running out of land: https://betterdwelling.com/city/toronto/researchers-destroy-narrative-greater-toronto-running-land/

Cordially,

Ben W. Kizemchuk

Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth
www.growthandincome.ca
www.altusinvest.ca
(416) 369-3024

55 Yonge Street, Suite 1100
Toronto, Ontario
M5E 1J4

All opinions and estimates contained in this report constitute the judgement of Ben W Kizemchuk of Wellington-Altus Private Wealth as of the date of this report and are subject to change without notice. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.