The Difference Between Mostly Dead, and Dead

8463430_origThe first (and so far only) good day in the markets for 2016 shouldn’t go by without instilling some hope in us investors. The latter half of 2015 and the first weeks of 2016 have many convinced that the market bull is thoroughly dead, having exited stage left pursued by a bear (appropriate for January). The toll taken by worsening news out of China, falling oil, and the rising US dollar have left markets totally exhausted and despondent. But is the bull dead, or just mostly dead? Because there’s a big difference between all dead and mostly dead. In other words, is there a case to be made for a resurgence?

I am, by nature, a contrarian. I have an aversion to large groups of people sharing the same opinion. It strikes me as lazy, and inevitably many of the adherents don’t ultimately know why they hold the views that they do. They’ve just gotten swept up in the zeitgeist and now swear their intellectual loyalty to some idea because everyone else has. And when I look at the market today, I do think there is a contrarian case for a market recovery. Not yet, it’s too early, but there are reasons to be hopeful.

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This book had a big impact on me growing up.

First, let’s consider the reasons we have for driving down the value of most shares. Oil prices. The price of oil has come to seemingly dictate much of the mood. Oil’s continued weakness speaks to deflation concerns, and stands in for China. It’s price is undermining the economies of many countries, not least of which is Canada. It’s eating into the profits of some of the biggest companies around. It’s precipitous fall has lent credence to otherwise outlandish predictions about the future value. Yet this laser like focus on oil has eclipsed anything else that could turn the tide in the market. Other news no longer matters, as the oil price comes to speak for wider concerns about China and growth prospects for the rest of the world. In the price of oil people now see the fate of the world.

That’s foolish, and precisely the kind of narrow mindset that leads to indiscriminate overselling. The very definition of babies and bathwater. And negativity begets more negativity. The more investors fear the worse the sentiment gets, leading to ever greater sell-offs. Better than expected news out of China, continued employment growth from the US, and the fundamental global benefit of cheap energy are being discounted by markets today, but still represent fundamental truths about economies that will bring life to our mostly dead bull tomorrow.

Don’t mistake me, I’m not trying to downplay the fundamental challenges that markets and economies are facing. Canada has real financial issues. They are not driven by sentiment, they are tangible and measurable. But they are also fixable, and they do not and will not affect every company equally. The same is true for China, just as it is true for the various oil producers the world over. What we should be wary of is letting the negative sentiment in the markets harden into an accepted wisdom that we hold too dear.

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Put another way, are the issues we are facing today as bad or worse than 2011, or even 2008? I’d argue not, and becoming too transfixed by the current market sentiment, the panicked selling and the ridiculous declarations by some market analysts only plays into bad financial management and will blind you to the opportunities the markets will present when a bottom is hit and numbers improve.

So is the bull dead? No. He is only mostly dead and there is a big difference between mostly dead and all dead. We will navigate this downturn, being mindful of both the bad news and the good news. Investors should seek appropriate financial advice from their financial advisors and remember that being too negative is just another form of complacency, a casual acceptance of the world as it currently appears, but may not actually be.

Remember, the bull is slightly alive and there’s still lots to live for.

For over 20 years we have been helping Canadians navigate difficult markets like this, by meeting in their homes and discussing their personal situations around the kitchen table. If you are looking for help, would like a complimentary review of your portfolio, or simply want to chat about your finances, please contact us today.

Oil’s Cheap, So Now What?

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Yes. I know I’m using the meme incorrectly. Please don’t email me about this.

The price of oil continues to fall, and it won’t be long before investors and the media will be asking whether it’s time to load up on energy within portfolios. Right now the primary focus is on how low the price can get, with current estimates suggesting that $30/barrel is not out of the question, and some predictions claiming it could go even lower. So when is the right time to buy, and how much of a portfolio should be allocated to energy?

These are good questions, but not for the reasons you might expect. Answering those questions mindfully should help any investor better understand the underlying assumptions that go into making smart investment decisions. For instance, why should a $30 barrel of crude be an attractive price to buy? Superficially we assume that it’s a bargain: the price was $100, now its $30, so you should buy some. But what should matter to an investor is not the new price but whether that price is inherently flawed. The sudden drop in the price of oil may lead us to believe that oil is too cheap, but if so what should the proper price be? Determining what a fair market price should be can be challenging, one matched only by trying to figure out when the price has actually bottomed and won’t go any lower.

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But say you feel comfortable that the price of oil has reached its final low and is significantly undervalued, you’ve still yet to figure out the best way to participate in the rebound. For instance, are you going to invest in individual oil companies, or will you purchase a mutual fund that buys a basket of various energy firms? If the former, what kind of companies do you want? Big energy firms like Shell and BP, or some of the very small producers? Will you be buying into shale oil, tar sands, or investing in energy production farther afield?

If that feels too complicated a set of questions to answer you could always buy an exchange traded fund (ETF). ETFs have become quite common today as a method to passively have your investments mirror various indices, but they were initially a way to simplify investing in commodity markets. So rather than focus on the companies that will extract the oil, you’d rather invest in the price of the barrel itself. That has the advantage of removing any extensive analysis that may be needed to be done on a company (profitability, type of oil investment, liabilities), but carries the down side of significant volatility.

MI-CH372_OILfro_DV_20150119163357Getting over all those hurdles leaves only the question of how much of a portfolio should be allocated to the energy sector. The answer here is as frustrating as all the rest, it will depend on how much volatility you can stomach. If you are encroaching on retirement, a good rule of thumb would be not too much (if at all). If you are very young and aren’t intending to use your investments for sometime you can presumably accommodate quite a bit more.

After all that the only thing left is to have the price rise. What could stand in the way of that? Perhaps a prolonged battle for market share that sees a continued lowering of the price, or even nations not sticking to their assigned production targets. Maybe an international treaty that could see a former energy producing nation reenter the market place, flooding it with cheap oil. An extended slowdown in a significant economy might also reduce global demand, prolonging the lowered valuation. Even the arrival of new technology could displace a portion of the market driving down future oil requirements. Or the simple knowledge that proven reserves are abundant can remove market concern of future shortages. In other words, lots of things can still prevent a rapid rebound in the price of oil.

The point here isn’t so much about oil but about more clearly seeing the risks that underlie “sure thing” opportunities. There is no easy money to be made in investing. Opportunities, no matter how superficially guaranteed they may seem still come with dangers that shouldn’t be ignored. Cheap buying opportunities can be good, and if they make sense should be pursued. But all investing comes with risks and not being aware of those risks can lead to serious mistakes in the management of a portfolio. More than one competent investor has been badly burned over-estimating the likelihood of a significant rebound. The lesson is don’t let your lust for opportunity crowd out sound investing strategies.