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In case you haven’t already heard, the granddaddy of capitalism is currently moving 100% of his personal wealth into American equities. “A simple rule dictates my buying,” Warren Buffett recently wrote in The New York Times, “be fearful when others are greedy, and be greedy when others are fearful.”
Of course, simple rules are a dime a dozen. Here’s another good investing one: Nobody has money to burn like the world’s richest man. If you lack the Oracle of Omaha’s cash flow, not to mention his influence as an investor (which allows him to land sweetheart preferred share and warrant deals), you should note that recent events have made fools out of some pretty darn smart economists, central bankers and market watchers.
Prem Watsa, chair of Fairfax Financial Holdings (TSX: FFH), thinks equity markets might still have a long way to fall before hitting bottom. This crisis, Watsa says, follows 20 years of “excess optimism” and it won't be over in a matter of months.
Maybe. Lower interest rates and bank bailouts are clearly not enough to guarantee a nice and clean market recovery. When the current financial crisis passes, the world will be left with a significantly weakened economy, larger government deficits and a semi-nationalized free market system. And nobody — not the bulls, not the bears — knows for certain what stocks, bonds, commodities (including oil), exchange rates, housing, inflation or global economic growth will do in the near term.
In the meantime, impulse buying and panic selling rule the day. That means investors can lose a bundle (at least in the short term) by investing in great companies at bargain prices. And, let’s be clear, when the bulls talk about cheap equities, most fail to mention that not all stock valuations are low by historic standards. Furthermore, Canadians who follow Buffett’s lead could see the value of their U.S. investments decline and lose out currency-wise if the loonie recovers along with oil and commodities.
If you have no stomach for risk, remember now is a good time to deleverage yourself. Paying down credit lines, loans and mortgages offers a guaranteed and relatively healthy return. That said, bear markets always separate the folks who tragically kill themselves over losses from the ones who go out and make a killing. And this bear could soon fall dead.
U.S. money manager David Kotok points out that there are actually three types of bears that maul investors. The most common are “cyclical bears,” which take markets down about 20%–25% from peak to trough. The most rare are the “devastating bears,” which “are 75%–90% calamities, like the Japanese collapse in the 1990s or the current sell-off in Chinese A shares.” What most markets are currently experiencing looks nothing like the mother of all devastating bears that attacked during the Depression era, when stocks lost 90% of their market value. In the crash of ’08, Kotok says, stocks have been knocked down by a “secular bear,” which typically eats about 45%–50% of the market.
Sometimes secular bears end with a clear climax. Sometimes they just peter out. But at the moment, Kotok says, it looks like the market probably bottomed on Oct. 10 — when the peak-to-trough declines on both the Dow Jones Industrial Average and the S&P 500 were about 45%. History suggests the demand for stocks will return in a huge way once the malaise gives way to a better outlook, especially with all the liquidity coming online. “The ratio of uninvested and potential cash to the aggregate value of the stock market is estimated to be above 40%,” Kotok says. “That is the highest percentage of uninvested cash in history.”
Opportunities clearly exist, especially in Canada, which the IMF expects to outperform the developed world. Nandu Narayanan — whose CI Global Opportunities Fund in New York has done very well this year predicting the turmoil — is also bullish on the Great White North. Aside from the banks, he likes virtually every well-financed Canadian stock, not to mention the national currency, which he thinks is ridiculously undervalued.
The following investment guide is aimed at investors who want to try to shoot out a few lights. Relatively speaking, Canada’s banking system is solid, but some institutions are always better bets than others, so we’ve ranked them by analyst consensus. Gold bugs (crazy and sane alike) insist bullion is about to go on an “epic bull” run, so we looked at how high prices could go and explain why the most extreme estimates should be taken with a ton of salt. We examined the health of the commodities sector that has been driving global growth, and we sliced and diced Canadian dividend plays.
You’ll also meet two very brave souls who convinced Eric Sprott to let them launch a new mutual fund just as the sky started falling, and get advice from an international team of top-notch economists. David Wolf, chief economist at Merrill Lynch Canada, takes a look at the world of bonds. John Calverley, the head of North American research for Standard Chartered Bank who foresaw the U.S. economic crisis in his last book, Bubbles and How to Survive Them, offers up his current outlook for U.S. and Canadian housing. And Bill Witherell, chief economist with New Jersey–based Cumberland Advisors (and a former OECD director of financial affairs), gives us his professional take on global equity markets.
Finally, just for fun, we assembled a list of potential investments. Some are big-name plays that could rebound nicely; others are speculative stocks with the potential to make you a bundle. In this kind of market, none are sure bets.
The goal of our guide is to serve up some food for thought while helping investors see the big picture, both defensively and offensively, and from inside and outside the box.
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