A terrific post of instructive bad investing advice starts us off in this edition. The importance of bank stock profit growth to foreign investment in Canadian stocks is next, and then a look at the potentially dangerous level of institutional mistrust – politics, media, medicine, law, among others – in Canada and elsewhere in the west.
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‘15 ways to lose money in markets’
Ben Carlson, director of institutional asset management at U.S.-based Ritholtz Wealth Management, is providing a useful service to investors with 15 Ways to Lose Money in the Markets. Rather than lecturing, the list is made more powerful by ironically and seemingly confidently advising how to do things wrong in markets.
Mr. Carlson starts in the right place with number one on the list: “Pretend you’re smarter than the market.” I usually define this rule as ‘the market’s never wrong’ - implying that when an asset price moves sustainably in a direction an investor doesn’t expect, it is highly probable that the investor has made a mistake.
Lower down on the list, the tongue-in-cheek advice is to try and time the market, which is an idea I think at this point everyone knows is a recipe for disaster. Later with “chase performance”, Mr. Carlson presents the biggest temptation among all the common market mistakes. I would imagine for example that there are very few people reading this who have not, at some point, thought about buying Nvidia over the past 18 months, or one of the tech or precious metals ETFs that are leading year to date fund returns.
The terrible idea of blaming central banks for underperformance is an investor tendency I will never understand. Central banks set the backdrop for rates and yields subject to their own mandate(s) and the job for the experienced investor is to adapt to it. Complaining about central bank policy is like complaining about the weather.
“Be pessimistic about everything” is also on the bad advice list and I took this one as a personal attack. I have the frequently unhelpful skill of identifying compelling reasons why a prospective investment might fail, causing paralysis and missed opportunities.
Mr. Carlson mentioned acting like Warren Buffett as another ill-advised strategy. With this he meant something I’ve seen a lot of – copying a famed investor’s affectations rather than what made them great. Folksy proverbs did not make Mr. Buffett one of the greatest investors of all time. The late Charlie Munger said that temperament was what separated the Oracle from mere investing mortals, allowing for extremes of patience, diligence, occasional ruthlessness, focus on downside and calm during periods of volatility.
“Try to become rich overnight’ is the last one that I will highlight. This warns against another temptation, particularly for investors nearing retirement, of trying to make up for lost time by owning high risk/high return assets that result in permanent loss of capital.
Mr. Carlson found a way to restate important investing rules in a different way with this list and should be commended. The entire piece is worth a read.
Chris Helgren/Reuters
Earnings
An uninspiring quarter for the banks
Bank earnings season starts Thursday with TD’s results, and RBC Capital Markets analyst Darko Mihelic isn’t expecting much for the major banks. Mr. Mihelic forecasts core profits to increase roughly nine per cent year over year, which doesn’t sound terrible, but also notes “we have seen signs of credit quality deterioration” that will lead to increased provisions for credit losses (PCLs) that are subtracted directly from earnings per share. He also expects a sequential decline in capital markets revenue on average.
The analyst rates only one major bank, TD, as “outperform”. He sees more upside in the insurance sector, rating Sun Life Financial, Manulife Financial and iA Financial Corp. as “outperform”.
Scotiabank strategist Hugo Ste-Marie emphasized one important implication arising from mediocre bank growth. In Tuesday’s Foreign investors show little interest in Canadian equities, Mr. Ste-Marie cites data showing that foreign investors are avoiding Canadian equities like it’s their job. There have been C$27-billion in equity redemptions in the past 12 months.
The strategist noted the divestment in June was mainly in shares of Canadian banks. “If banks manage to beat expectations and deliver solid results [this earnings season], global investors could be tempted to make a comeback and possibly turbo-charge TSX returns once again,” he said.
Diversions
Is Canada failing?
Cheating is an ugly word so let’s say I’ve been opportunistic in the mornings to generate more internet traffic with my Daily Links report. On Tuesday, for example, I quoted the Scotiabank research report titled Foreign investors show little interest in Canadian equities for the headline.
Why is this opportunistic? Because I know there is so much disgust for Justin Trudeau among segments of the readership and they would flock to any headline where a sarcastic “Trudeau’s Canada” comment is explicable.
There has never been a leader without a faction of haters but mistrust in politicians has steadily climbed to a fever pitch in recent years. This is part of a trend of institutional skepticism that encompasses religion, finance, media, law (and definitely law enforcement), and education. The COVID-19 pandemic also uncovered a deep mistrust in the medical profession.
M.I.T. economics professor Daron Acemoglu and James A. Robinson, a University of Chicago economist and political scientist, wrote Why Nations Fail to argue that institutional mistrust is a symptom of a failing country. This trend, far from unique to Canada, is worrying enough that I’ve avoided revisiting the book so far.
The essentials
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The Rundown
Our popular TFSA Trouncers series this week profiles an accountant who was fortunate enough to build up a $1.7-million TFSA - until Tesla shares started to go in reverse.
In the wake of Tuesday’s Canadian inflation report, a look at the latest bets in money markets for where interest rates go from here.
Looking for Canadian dividend growth stocks? This Number Cruncher is sure to provide some ideas.
The latest Reuters poll of portfolio managers and market strategists on where they see the TSX heading over the next 16 months.
What’s up next
With CPI behind us the focus turns to bank earnings. TD is followed by BMO and Scotiabank on the 27th. National Bank and Royal Bank report on the 28th and CIBC follows a day later. Sandwiched in there on August 23 is retail sales for June, a data series which continues to provide a window into the extent to which higher interest rates are affecting household finances. A month-over-month decline of 0.3 per cent is expected for the headline number, or a decline of 0.2 per cent ex-autos.
Not much going on in the U.S. with earnings season winding down. Fed Chair Jerome Powell later this week will speak at Jackson Hole, Wyoming, and may provide some clues about interest rate moves ahead. The initial jobless claims data that comes out every Thursday has been causing some volatility lately. This week, 232,000 is forecast.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)