Would starting all over again from scratch make you a better investor? For behavioural finance analyst Ken Norquay, a friend’s sudden and total move across the country caused him to wonder if you can really leave your belief systems behind. How would you invest with a fresh start in life?
Last month, my friend sold his house in Hamilton, packed all his belongings into his car, and drove to British Columbia. His stated reason was that he wanted to avoid Ontario’s winters in his retirement. But I suspect he had a deeper reason.
I wondered about the boldness of his move; he would have had to dispose of all his possessions. “Time for a clean slate,” he said. He reminded me of those Syrian refugees who came to Canada last year. The difference, of course, is that the Syrians were forced to move, while my friend did it voluntarily. But what I really wondered about was this: Did either my friend or the Syrian refugees leave behind their belief systems?
Our belief systems are what define our lives.
This truth is particularly evident in the investment world.
What if you did what the Syrian refugees were forced to do, or what my friend did voluntarily? What if you sold all your investments today? Then you waited a month or two and bought new investments. What would you buy? Why? Would you feel nervous during that month of sitting on the sidelines? Would you feel nervous about buying a new portfolio? Would you update your portfolio or would you buy back all the same investments you had?
The power of objective investing
In my stock market book, Beyond the Bull, I talk about our ‘instinctive centre’. Our instinctive centre is that part of our psychological makeup that pays attention to what we own. It connects our ego to our possessions. It thinks our possessions are special because they are ours. For example, there are 7,000 2016 Chevy Impalas in North America. If any of 6,999 of them gets a scratch or dent, we don’t really care. But if our 2016 Chevy Impala gets a scratch or dent, it’s a big issue. This particular Chevy Impala is important because it belongs to us. That’s our instinctive centre at work. In the stock market, we pay attention to the stocks we own, and not so much to the stocks we do not own. Once again, this is our instinctive centre at work, guarding what’s ours. It’s a perfectly natural way for us to behave.
However, it has a major effect on your investment portfolio. We come to identify with whatever investments we hold and ignore others that we do not. Our wishes and hopes ride with the investments we own. We often make excuses, spin stories or harbour irrational hopes regarding the investments we own, much more than those we do not own. The ones we own seem so much more important because our instinctive centres make them seem important. That’s why our ‘sell everything today’ exercise is so useful. Once you no longer own a given investment portfolio, you can view all investments with equanimity, without bias. You can become objective about investing. Over the long haul, objective investors make better decisions than emotionally charged subjective investors. Better investors have higher rates of return.
To own or not to own?
Let’s review today’s major investment trends without bias, and try to sort out what we’d really like to own or not own.
US stock market: The trend is up. The S&P500 index touched another all-time high last month. This longer-than-usual up trend dates back to March 2009. We continue to urge caution, even though we recognize we have been overly-cautious in the past.
Canadian stock market: Technically, the TSX Composite is in an up trend, but it is significantly weaker that the US stock market. June’s high of 15,943 was only marginally higher than the 2014 high of 15,685 and the 2008 high of 15,154. The TSX has experienced major fluctuations, but it has barely made progress these past nine years. It’s a ‘buy-low-sell-high’ market, not a ‘buy-and-hold for the long-term’ market.
US 20-yr + interest rates (as measured by the yield on 20-yr + US treasury bonds) bottomed in July 2016. Short-term interest rates have confirmed this down-to-up trend reversal. The US Federal Reserve Board has increased short-term interest rates so far this year and has announced its intention to increase rates even more.
Canadian 20-yr + interest rates have mirrored their US counterpart. However, the Bank of Canada has only recently raised short-term rates.
Canadian dollar (vs. US dollar) remains in a down trend that began in the spring of 2011. In the last three years, the loonie has been touted as a ‘petro-currency’ that rises and falls in lock step with the price of oil. However, that has changed during the past few weeks. Since the end of May, the price of crude oil has zigzagged lower, but the loonie has moved higher. The Canadian dollar is no longer a petro-currency.
It is also interesting that, during this same time, US short-term interest rates moved higher before Canadian interest rates. Normally the difference in interest rates between nations affects their currencies. Normally this event would have put downward pressure on the Canadian dollar. Not this time. Something is changing. We take these two factors as warnings that the long-term down trend of the loonie might be ending. Let’s keep our eye on this one.
The US dollar vs the basket of non-US currencies: Since early 2015, the US Dollar has been in a slight up trend. It’s like watching grass grow; it’s a slow process. It might be more useful to say the US dollar is stable rather than in an up trend, but statistically the trend is up.
Gold: The price of gold has also been in a weak up trend since the low in December 2015.
Oil: Oil prices have been in an up trend since December 2016.
In the long run
Because the prices of oil and gold are in long-term up trends, speculators and traders can focus their attention on these two sectors. The following is a list of Canadian and US oil stocks and gold stocks that are currently in long-term up trends:
OceanaGold (TSX—OGC), Silver Standard Resources (TSX—SSO), NovaGold Resources (TSX—NG), Detour Gold Corp (TSX—DGC), Semafo (TSX—SMF).
Obsidian Energy, formerly Penn West Petroleum (NYSE—OBE; TSX—OBE), Transatlantic Petroleum (NYSEMKT—TAT), Vermilion Energy (NYSE—VET; TSX—VET), Chesapeake Energy (NYSE—CHK), Marathon Oil Corporation (NYSE—MRO), Cabot Oil and Gas (NYSE—COG).
However . . .
Caveat #1. These stocks are volatile; that’s what makes them good for speculation. However, it is important that you have a good trading strategy before buying stocks like these. Your trading strategy will address issues like: When will you buy? When will you sell? What percentage of your portfolio will you bet on any position?
When I was a young officer in the Canadian Armed Forces, I remember a wise old major telling us: “If you can’t take a joke, you shouldn’t have joined.” This is very true of the art of stock trading. It is important to develop a sense of humour toward your losses—and toward speculation and trading as a whole.
All these stocks are in multi-year up trends and all have declined within those up trends.
Caveat #2: The US stock market is near the end of a long-term up trend. If/when that market turns down, speculation on up trends will be much riskier. One of the signs that a long-term top is near is volatility. Volatility has been very low these past few weeks. Technicians describe this as ‘the calm before the storm’. Usually a low-volatility up trend is followed by a high-volatility down trend. Those of you who have been thinking of selling your house, selling your investments and moving to the west coast like my friend, should put that ‘For Sale’ sign on your lawn now.
But people don’t do that, do they? Who voluntarily divests and changes their life? We simply don’t do those things unless we have to. War forced the Syrian refugees to change their lives. But we all recognize that, in the long run, those Syrians will be better off because of the involuntary act of moving to Canada.
My friend who moved to the west coast taught me an important investment lesson: Think like a refugee. Every once in a while, we should imagine ourselves starting from scratch. It’s a way to train our minds to be more objective. It’s a way to improve our long-term rate of return by becoming better investors. In the long run, we’ll be better off.
Ken Norquay, Chartered Market Technician, is the author of the book Beyond the Bull which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at firstname.lastname@example.org.
This is an edited version of an article that was originally published for subscribers in the July 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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