SEP 22, 2022

Money, happiness & Haggis

BY KEITH THOMSON

Last month we said goodbye to our dog, Haggis. 
 
For those of you who have gone through this kind of experience, I’m sure you would agree that the pain of loss from the death of a beloved pet is an intense emotional experience. At least for me, I reluctantly have to admit... it was even more emotional than I had anticipated. However, as my daughter, Kiera, wisely pointed out, instead of dwelling on his passing, we should focus our thoughts instead on the 10 years of unconditional love, companionship, and happiness that Haggis offered our family. 

Kiera.jpg

The last picture I have of Kiera and Haggis.

I was reminded of my daughter’s insight as I was reading the book, “Happy Money. The Science of Happier Spending”. Perhaps surprisingly, the book concludes that if you think money doesn’t buy happiness, then you’re not spending it correctly!
 
The five key takeaways from the book are:
 
1) Buy Experiences - Research shows that experiences provide more happiness than material goods, in part because experiences are more likely to make us feel connected to others.
 
2) Make it a Treat - Abundance, it turns out, is the enemy of appreciation.
 
3) Buy Time - Consistently asking yourself how purchases will affect your time, your dominant mindset should shift, pushing you toward happier choices.
 
4) Pay Now, Consume Later - Delaying consumption can enhance pleasure, but people don’t always recognize the benefits of delay. I experienced this when I purchased my most recent car. Because I could only take delivery a few months down the road, I found that actually looking forward to driving it was a surprising and significant benefit of the overall purchase experience.
 
5) Invest in Others - The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The more they invested in others, the happier they were. Amazingly, the effect of this single-spending category was as large as the effect of income in predicting happiness. 
 
Can happiness be bought? Well, at least for our family, between chew toys, food, doggy insurance premiums, veterinary bills (especially veterinary bills!) we chose to spend many thousands of dollars on our dog. Was Haggis one of our best “return on happiness" investments? Absolutely!

Q-Grey-1.png

I always wanted to be the kind of guy our dog thought I was every time he greeted me after I came home from work!
Keith Thomson (1st time self-quoting 😊)

Q-Grey-1.png

THANKS FOR SUBSCRIBING

By providing your email address, you provide us with your express consent to send you commercial electronic messages related to finances and/or investments that maybe of interest to you. Should you wish to discontinue receiving emails of this nature, you may contact us to withdraw your consent at any time. Your personal information will not be distributed, sold, or traded – it will remain strictly confidential and will only be used for the purpose for which it was provided. For more information on CI Private Wealth’s commitment to privacy and responsible use of information, please click here.

AUG 16, 2022

Could that be it?

BY KEITH THOMSON

At its worst the S&P 500 (which consists of 500 of the U.S. and the world's most profitable companies) bottomed out mid-June, declining approximately 24% from its earlier highs in the year.* Since then it has staged a remarkable come back. One may ponder, “Could that be it?” regarding this most recent bear market. Frankly, the only honest but, admittedly, emotionally unsatisfying answer is, “I don’t know". In fact, I would suggest that there are only two types of market forecasters: those who know they are completely full of B.S. and those who do not.
 
Given that there are many of these so called “experts” more than willing to share their opinions regarding the short term direction of the market, I find the real challenge for me is separating the “signal” from the “noise”. Over time I have learned that one way to do this is to pay attention to those individuals whose wisdom (often using historical context to back up their well reasoned opinions) is worth following. Ben Carlson is one such individual. In a recent blog, he attempts to explain the most recent downturn by putting into context the length and depth of past bear markets. 

The Longest & Shortest Bear Markets by Ben Carlson, July 19, 2022

2022-AUG.png

However, there is one prediction that I do feel confident in sharing - if there’s one thing that all bear markets do have in common … it is that they all eventually end!

Source: Fortune.com, Finance Quarterly Review “How long bear markets typically last - and how you should think about investing during one” by Ben Carlson, July 14, 2022.

Q-Grey-1.png

Journalism, by its nature, has to sell you news instead of truth. The ninth time in a row that any investing magazine headlined the real truth – “Own, don’t loan; patience and discipline; slow and steady wins the race; end of story!” – it would go out of business, because its audience would have gotten the message and wouldn’t need to read it anymore. To survive, a magazine has to keep blaring, “Six Hot Funds To Buy Now!” And of course, they’re always six different funds. This is helpful to the magazine, but not to the investor.
Nick Murray

Q-Grey-1.png
 

JUL 14, 2022

How you make money in the stock market

BY KEITH THOMSON

The first six months of 2022 saw the 500 largest publicly traded companies in the U.S., the S&P 500, temporarily decline 23.6% from its all-time high at 4,796.56 on January 3rd to a closing low (so far) of 3,666.77 on June 16th. The Index finished its worst first half since 1970 at 3,785.38.

More noteworthy even than the extent of the decline was its gathering violence: in mid-June the market ran off a streak of five out of seven trading days on which 90% of S&P 500 component stocks closed lower. This is one-sided negativity on a historic scale.

Let's stop right there. Because, regardless of any and all other points I wish to make in this report to you, the most urgent should already be clear.

Simply stated, the best way to destroy any chance for lifetime investment success has historically been to sell one's quality equity portfolios into a bear market.

But to sell when investor sentiment is sufficiently negative to drive 90% of S&P stocks lower on five out of seven trading days—to sell, that is, when everyone else is selling—must strike us as the height of long-term folly.

With that clearly on the record, let me attempt to make some kind of sense out of what's going on here. I may have made some or all of these points to you earlier. If I have, please bear with me: they seem more than worth repeating. To do so, I need to take you back to the bottom of the Great Panic on March 9, 2009. From that panic-driven trough, the S&P 500 (with dividends reinvested) compounded at 17.6% annually for the next twelve years through to the end of 2021. At its peak this past January 3rd, the Index was up seven times from its low. This was one of the greatest runs in the whole history of North American equities.

Moreover, the Index's compound return over the last three of those years—2019 through 2021, encompassing the worst of the coronavirus plague—shot up to 24% annually.

But when inflation soared late last year, it became painfully evident in hindsight that equities' jaw-dropping advance over those three years had been fueled to some important extent by an excess of fiscal and monetary stimulus, mounted to offset the economic devastation of the pandemic. In one sentence: the Federal Reserve created far too much money, and then left it sloshing around out there far too long. This was also true for our own Bank of Canada.

And as Milton Friedman taught us, since inflation is always and everywhere a monetary phenomenon, we investors now find ourselves having to give back some of the extraordinary 2009–2021 market gains, as the Fed (and central banks around the world) moves belatedly to sop up that excess liquidity by raising interest rates and shrinking its balance sheet.

Yes, the war in Eastern Europe and supply chain woes of various kinds have exacerbated inflation, but in my judgment they're irritants: monetary policy (seasoned as well with a bit too much fiscal stimulus) got us into this mess, and monetary policy must now get us out. The fear, of course, is that the Fed will overtighten, putting the economy into recession.

My position in all my discussions with you has been, and continues to be: so be it. If an economic slowdown over a few calendar quarters is what it takes to stamp out inflation, it would be by far the lesser of the two evils. Inflation is a cancer, and it must be destroyed.

JUL-2022.png

With regard to our investment policy, nothing has changed because nothing ever changes. In other words, we are long-term, goal-focused, plan-driven equity investors. We own diversified portfolios of superior companies. These companies have demonstrated the ability to increase earnings (and in most cases dividends) over time, thus supporting increases in their value.

We act continuously on our financial and investment plan: we do not react to current events, no matter how distressing they may be. After 30 months of chaos—the pandemic in its several variants, the bizarre U.S. election that would not end, roaring inflation (most painfully in stupefying gas price increases), the supply chain mess, war in Europe and so on—we're all understandably exhausted. And I most certainly do mean we. That's when the impulse to capitulate—to get to the illusory “safety” of cash—becomes strongest. So that's when the impulse must be resisted most strongly. And that's my job.

This too shall pass. I'm here to talk all this through with you at any time. Thank you for being my clients. It is a privilege to serve you.

P.S. For a deeper dive On the Inevitability of Bear Markets, I encourage you to read Ben Carlson’s excellent article.

*Sources for S&P 500 prices: Standard & Poor's, as reported by Yahoo Finance. Compound growth rates: Standard & Poor's, DQYDJ S&P 500 return calculator, Ibbotson 2022 Yearbook.

Q-Grey-1.png

Over decade-long time horizons, your investment performance will mainly be derived from how you handle corrections, bear markets, and market crashes. During every single bear market there will be times when you wonder if the losses will ever stop. You will always wonder how much lower the market can go. The economic news will be terrible. Other investors around you will be depressed. Pessimism becomes pervasive.
Ben Carlson

Q-Grey-1.png
 

JUN 15, 2022

The most dangerous person in your investing world

BY KEITH THOMSON

I believe Morgan Housel’s “Covid crash” quotation thoughtfully distils approximately 80% of an investor’s long term success in the stock market. Fast forward to now, with the S&P 500 down over 20% from its earlier highs this year, and you have a present day experience of how you will succeed as an investor. We’ve all heard of Maslow’s Hierarchy of Needs but are you familiar with The Hierarchy of Investor Needs? If you truly appreciate what Morgan Housel is saying in the article below, you’ll be able to successfully navigate today’s market environment … and any other future challenging markets! 

The Hierarchy of Investor Needs

By: Morgan Housel, One Step at a Time, The Motley Fool

One summer in college I interned at an investment bank. It was the worst job I ever had. A co-worker and I survived our days by bonding over a mutual interest in the stock market.

My co-worker was brilliant. Scary brilliant. The kind of guy you feel bad hanging out with because he makes you realize how dumb you are. He could dissect a company’s balance sheet and analyze business strategies like no one else I knew or have known since. He was the smartest investor I ever met. 
 
He went to an Ivy League school, and after college he landed a high-paying gig at an investment firm. He went on to produce some of the worst investment results you can imagine, with an uncanny ability to pile into whatever asset was about to lose half its value.  
 
This guy is a genius on paper. But he didn’t have the disposition to be a successful investor. He had a gambling mentality and couldn’t grasp that his book intelligence didn’t translate into investing intelligence, which made him wildly overconfident. His textbook investing brilliance didn’t matter. His emotional faults led him to be a terrible investor.
 
He’s a great example of a powerful investing truth: You can be brilliant on one hand but still fail miserably because of what you lack on the other.
 
There is a hierarchy of investor needs, in other words. Some investing skills have to be mastered before any other skills matter at all. 
 
Here’s a pyramid I made to show what I mean. The most important investing topic is at the bottom. Each topic has to be mastered before the one above it matters: 

The-Pyramid-of-Investment-Success.jpeg

Every one of these topics is incredibly important. None should be belittled.
 
But you can be the best stock-picker in the world, yet if you buy high and sell low – the epitome of bad investing behavior – none of it will matter. You will fail as an investor.
 
You can be a great stock-picker, but if you only have 20% of your assets in stocks – a poor asset allocation for most investors – you’re not going to move the needle.
 
You can be a super-tax-efficient investor. But if your stock selection is poor, you’re not going to have many capital gains to pay taxes on in the first place. And if you’re paying too much for advice, tax savings can be irrelevant. 
 
A common problem for any investor to stumble on is the temptation to solve one problem without first mastering a more fundamental one. It can drive you crazy, because if you’ve gotten the hang of an advanced topic, you might think that you’re on the road to success, but something more basic like investor behavior or asset allocation could still put you on a road to ruin. Just like my old co-worker.


*Copyright 1995-2022 The Motley Fool. All rights reserved.*

Keith again ... I find that many people spend far too much time focusing on the top of the investment pyramid. Probably (but not only) because this is what financial journalism focuses on as it emphasizes what is quantifiable, scary, and urgent. Clearly understanding that it’s your potential poor behaviour which makes you possibly the most dangerous person in your investing world, is key to your long term success as an equity investor.

Q-Grey-1.png

How you behaved in March 2020 was probably more important than what you did in the previous 100 months combined.
Morgan Housel

Q-Grey-1.png
 

MAY 18, 2022

Time for a little context

BY KEITH THOMSON

It seems to me that the primary function of financial journalism is to scare us out of ever achieving our financial goals by focusing on the market’s daily volatility. More specifically, volatility on the negative side …. of course we’re all fans of volatility when our portfolio goes up! Recently we’ve been reminded of this, almost hourly, when the S&P 500 approached “official bear market territory” which is defined as closing 20% below its January all-time high. 

 

Here’s one of my all time favourite financial comic strips!​

calm-has-a-coefficient.jpg

Every market decline of this magnitude has its own set of unique precipitating causes. I think it’s fair to say that the current decline is a response to two issues: severe inflation, and the extent to which the economy might be driven into recession by the Federal Reserve and our Bank of Canada’s somewhat belated efforts to root out that inflation. (Russia’s war on Ukraine, supply chain issues and the like are surely also contributing to the angst, but recession vs. inflation is the main event, in my opinion.)
 
I look at it this way:
From March 2009 (when the equity market bottomed at the end of the Global Financial Crisis) through to the end of 2021, the S&P 500 produced an average annual compound return of 17.5%. Indeed, over those last three calendar years (2019 – 2021), despite a hundred-year global health crisis that affected millions of people worldwide, the Index compounded at 24% per year. This was truly one of the greatest runs of all time.*
 
It’s evident that some part of that extraordinary accretion in equity values was due to excessive monetary stimulation by central banks around the world. And, to that extent, we are having to give some of that gain back as these same central banks move to bring the resulting inflation under control. We should, I believe, want them to do this, even if it means the economy slows. In the long run, the cure (possible recession) is not more painful than the disease (inflation).
 
For long-term investors, capitulation to a bear market by fleeing equities has often proven to be a tragedy, from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of capturing equities’ premium returns is by riding out their occasional declines.
 
My mission therefore continues: not to insulate you from short to intermediate-term volatility, but to minimize your long-term regret – the regret that has always followed a fear-driven exit when equities resume their long-term advance. As they always do and have.
 
As always, I continue to counsel staying the course. I’m always here to talk this through with you. Thank you for being my client. It is a privilege to serve you.

Q-Grey-1.png

About once a decade people forget that bubbles
form and burst about once a decade.

Morgan Housel

Q-Grey-1.png
 

MAR 7, 2022

Time to feed the goose

BY KEITH THOMSON

Please find below two CI Private Wealth tax resources which may assist you in dealing with your 2021 and 2022 tax reporting.

CIPW 2022 Personal Tax Calendar

CIPW 2021 Personal Income Tax Organizer

As we prepare for this year’s “plucking” perhaps the article below will help minimize the “hissing”. The article, written by Ryan Holiday, is directed towards an American audience (with a Stoic bent). However, if you change the date to April 30th, the message is no different for us Canadians.​

040bb22d-0fac-4813-8403-4675323156fc.png

The Taxes of Life

Daily Stoic - Ryan Holiday

April 17th is the day that Americans pay their taxes. It’s a day of mixed reactions depending on your outlook and politics. Some choose to focus on the good things their taxes pay for and have paid for since Roman times—the roads, the armies, services for the poor. Others focus on the waste (tax corruption and waste is also as old as Rome) or question the morality of the system altogether. Last year when we posted a note about taxes, a number of comments wrote angrily that “taxation is theft!” while others angrily responded to those commenters with defenses of their own. (All this anger being somewhat ironic for Stoics.)​

In a way, this misses the point. What we should be doing is zooming out and looking at the larger picture: People have been complaining about their taxes since the beginning of civilization. And what has become of it? Taxes are higher than ever and they’re dead. Death and taxes. There is no escape. So let us waste no time and create no misery kicking and screaming about it. Let us not add to our tax bracket the cost of frustration and resentment.

Taxes are an inevitable part of life. There is a cost to everything we do. As Seneca wrote to Lucilius, “All the things which cause complaint or dread are like the taxes of life—things from which, my dear Lucilius, you should never hope for exemption or seek escape.” Income taxes are not the only taxes you pay in life. They are just the financial form. Everything we do has a toll attached to it. Waiting around is a tax on traveling. Rumors and gossip are the taxes that come from acquiring a public persona. Disagreements and occasional frustration are taxes placed on even the happiest of relationships. Theft is a tax on abundance and having things that other people want. Stress and problems are tariffs that come attached to success. And on and on and on.

There’s no reason or time to be angry about any of this. Instead, we should be grateful. Because taxes—literal or figurative—are impossible without wealth. So what are you going to focus on? That you owe something, or that you are lucky enough to own something that can be taxed.

Q-Grey-1.png

Taxes are our way of feeding the goose that lays the golden eggs of freedom, democracy and enterprise. Someone says, 'Well, the goose eats too much!’. That’s probably true. But better a fat goose than no goose at all.
Jim Rohn

Q-Grey-1.png
 

FEB 23, 2022

Reflections on the last 24 months

BY KEITH THOMSON

The last 24 months saw the advent of the worst global public health crisis in a century —since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a kind of medically induced coma.

In this country, the immediate effects were (1) a savage and nearly instantaneous economic recession, accompanied by record unemployment, and (2) the fastest, deepest collapse in stock prices in living memory, if not ever.

This missive follows the format of my annual reports to you. It’s divided into two parts, the first a statement of general principles, especially those most relevant in the current crisis, with a restatement of how I practice my stewardship of your invested wealth. The second is a review of what little can be known at this point, and of how I propose we continue to deal with the pervasive uncertainties of the moment.

General Principles

  • You and I are long-term, goal-focused, plan-driven equity investors. We believe that the key to lifetime success in equity investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure proceed inevitably from reacting to (let alone trying to anticipate) current economic/market events.
     

  • We're convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically always temporary declines.
     

  • Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at least twice that. And on two occasions (in 2000-02 and 2007-09), the Index has actually halved. Yet the S&P 500 came into 1980 at 106, and went out of 2021 at 4,766.18 over those 42 years, its average annual compound rate of total return (that is, with dividends reinvested) was more than 12%.*
     

  • These data underscore my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.
     

  • These principles will continue to govern the essentially behavioural nature of my advice to you in the coming year, and beyond.

FEB-2022.png

Current Observations

  • It would seem to be counterproductive to look at these past 12 months in isolation. They were, rather, the second act of a drama that began early in 2020, the precipitant of which was the greatest global public health crisis in a hundred years.
     

  • The world elected to respond to the onset of the pandemic essentially by shutting down the global economy—placing it, if you will (and as mentioned above), in a kind of medically induced coma. In this country, we experienced the fastest economic recession ever, and a one-third decline in the S&P 500 in just 33 days.
     

  • The Bank of Canada, and the Federal Reserve in the U.S., responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent. This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no direct antecedents. This renders all economic forecasting—and all investment policy based on such forecasts—hugely speculative. I infer from this that if there were ever a time to just put our heads down and work our investment and financial plan—ignoring the noise—this is surely it.
     

  • If 2020 was the year of the virus, 2021 was the year of the vaccines. Vaccination as well as acquired natural immunity are in the ascendancy, regardless of how many more Greek-letter variants are discovered and trumpeted to the skies as the new apocalypse. This fact, it seems to me, is the key to a coherent view of 2022.
     

  • In general, I think it most likely that in the coming year (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Bank of Canada and the Federal Reserve begins draining excess liquidity from the banking system with the accompanying inevitable increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other exogenous variable—which we can never really do—equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they've been soaring since the market trough of March 2020.
     

  • Please don't mistake this for a forecast. All I said, and now say again, is that these outcomes seem to me more likely than not. I'm fully prepared to be wrong on any or all of the above points; if and when I am, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we've made, and not at all by current events.
     

  • With that out of the way, allow me to offer a more personal observation. To wit: these have undoubtedly been the two most shocking and terrifying years for investors since the Global Financial Crisis of 2008-09—first the outbreak of the pandemic, next, divisive elections in both Canada and the U.S., then the pandemic's second major wave, and most recently a 40-year inflation spike. You might not be human if you haven't experienced serious volatility fatigue at some point. I know I have!

But like that earlier episode, what came to matter most was not what the economy or the markets did, but what the investor himself/herself did. If the investor fled the equity market during either crisis—or, heaven forbid, both—his/her investment results seem unlikely ever to have recovered. If on the other hand he/she kept acting on a long-term plan rather than reacting to current events, positive outcomes followed. It was ever thus. I expect it always will be.

I’m often asked by newer clients, “What do you think the market is going to do this year?” More often than not my response is, “You are definitely not paying me to predict the rain… no one can do that. What you are paying me is to build you a financial ark so that no matter what happens (when the storm inevitably but unpredictably comes) to the stock market or the economy, you and your family will secure a lifetime of financial security.” 

Q-Grey-1.png

The ones who thrive long term are those who understand the real world is a never ending chain of absurdity, confusions, messy relationships, and imperfect people.“ 
Morgan Housel

Q-Grey-1.png
 
 

JAN 19, 2022

It isn’t always going to be this easy

BY KEITH THOMSON

I believe 2021 will go down as one of the greatest years in stock market history. Including dividends, the S&P 500 was up 28.7%. Even better, the market achieved this return with a correction of only 5.2% during the entire year. And this is coming off a 31% return in 2019 and 18% in 2020*! Suffice it to say returns are not always going to be this accommodating. As Warren Buffet’s older and, many would suggest, wiser business partner, Charlie Munger, would say, “It’s not supposed to be easy (investing). Anyone who finds it easy is stupid”.

Please do not misunderstand me, I am decidedly not predicting that the U.S. market, the largest, most diversified market in the world, is is going to experience a significant correction in 2022. Long time readers of this newsletter know that I am completely agnostic to the unknowable short to medium term movements (either up or down) in the stock market. What I am suggesting is that you “vaccinate” (sorry, could not resist) your mindset in advance of a potential market decline. Just as the sun rises in the East and sets in the West a bear market, at some point in the future is absolutely inevitable. Referencing the quote that began this missive, psychological preparation in advance will allow you to pass through this decline with equanimity.

JAN-2022.png

For more context regarding last year’s market return, I encourage you to click through to Ben Carlson’s excellent blog, “2021 Was One of the Best Years in Stock Market History”.

Q-Grey-1.png

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre results you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
Charlie Munger

Q-Grey-1.png