Bumping off a Bottom?
March 30th, 2009We’re not in the business of picking bottoms (or tops) in market cycles, but it’s always worthwhile to use any indications of a turning point to decide when to start looking more seriously at potential investment opportunities. We’ll still wait for evidence of consistent up-trends in stocks, ETFs and other investment vehicles before putting our capital to work, but we’ll intensify our homework at times like this when the odds are shifting in our favour.
The S&P/TSX Composite Index rose another 3.7% last week in spite of a pull-back on Friday that appears to be continuing into today (Monday). Seven of the ten Canadian S&P sector indexes have positive trend values now, which is definitely encouraging, even if consistency is weak. More importantly, the commodity (ENERGY, MATERIALS), financial (FINANCIAL SERVICES) and technology (INFORMATION TECHNOLOGY) sectors are all in the top 5 trend-wise. That is what you’ll want to see coming out of the bottom of a bear market.
The S&P/TSX Venture Index rose 6.6%. This is definitely where the action is for the risk-takers right now. The S&P/TSX Venture Index is up 20% year-to-date compared to -2% for the S&P/TSX Composite Index. If you have the stomach for penny-stocks, you might want to subscribe to our Premium Service ProfiTrend-Canada Database updates. The roughly 2000 stocks there include over 600 from the Venture Exchange.
We now have 71% of the S&P/TSX Composite Index constituents stocks with positive trend values. This would normally be ideal, if we had better consistency values with the individual equities. That takes time to build. (We already know that the New Years spike above 80% was definitely not a time to buy for the same reason.)
All the same, and even if we have a bad week or two right now, this is the time to intensify your homework to be well-positioned to profit from the next bull run.
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Those who read these updates regularly will have noticed that we’ve been “politely” critical of buy-and-hold investors in recent weeks. This isn’t so much to rub their noses in their 40-50% losses over the past 12 months or so, as to remind them that those are catastrophic losses, and it will be many years before their portfolios are back to the levels they had achieved before this bear market. Even quintessential buy-and-hold gurus like Warren Buffet are admitting that they made horrible mistakes.
In the past, buy & hold investing was popular, in part out of laziness or the fact that in the long-run (25 years+) you probably end up ahead, but also because transaction costs used to be so high. Many buy and sell orders that would have commission fees of $10 or less today with discount brokers would have cost $100-200 as recently as 20 years ago or less. Buying $2000 worth of stock with a $100 fee to buy and again to sell, meant that your stock had to gain 10% just for you to break even and start making profits. So, even those that felt that buy & hold was a crazy practice in the first place held on to equities for a longer period of time than they would have liked… often resulting in significant losses for that reason alone.
Of course those who could afford to buy $20,000 or $100,000 of the same stock at that time weren’t penalized as much percentage-wise. The system was clearly biased against the smaller investor. Not so any more, so you can’t rationalize buy & hold on outrageous commissions anymore.
Having said all that, I couldn’t help but be surprised when Derek Foster, self-proclaimed “Canada’s youngest retiree” and author of several books on “holding good stocks forever”, sold his entire portfolio at the beginning of this month. WOW!!!
I’m getting this info from an article/interview in the Globe & Mail’s ROB, March 12, 2009. I’ll definitely be checking out one or two of his books to get a feeling for how he went wrong or how he led individual investors to adopt his approach. If you want to do the same, in order of publication…
- Stop Working, Here’s How You Can!
- The Lazy Investor
- Money for Nothing and Your Stocks for Free!
These are obviously titles that inspire getting rich quick with minimal effort and a buy & hold approach.
(The books aren’t available at Amazon.ca, but you can find them at chapters.indigo.ca . Simply search on “Derek Foster” or one of the titles.)
Although the Ottawa-native wasn’t specific on this, he presumably lost half of his portfolio’s value like most buy & hold practitioners. He’s also looking for more downside, which he claims is why he sold everything. The indicators he’s watching include…
- Yield on the Dow… Foster believes the right time to buy is when the yield hits 6%. It’s only at 4% now.
- Market capitalization to total GDP… It’s between 70% and 80%, but should be about 50% at the bottom.
- General P/E ratio… On the S&P500, markets bottom at single-digit P/E’s. It’s about 11 now.
All of those indicators may be worth keeping an eye on, but to liquidate at these levels really seems like an act of pure panic. Time will tell, but Foster abandoning his “proven” approach at this time may well end up being a contrary indicator for the rest of us.
In fairness Foster hasn’t closed out his trading account yet… he’s decided to indulge in the far riskier options market… selling put-options. If stocks fall further he’ll be forced to buy them from the contract buyer at a specific price. If they don’t fall further, he’ll have some premium income, not unlike dividends. We’ll save any further discussion on this for another day.