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Investing: taking risks in the new economy

Old economy, new economy. Finding safe off-farm investments in a perilous world

It is the question closest to the hearts and digestions of most investors: How long can the good times last? The tech-heavy NASDAQ Composite index was up 26.3 per cent for the 12-month period ending June 7, 2017. Canada’s S&P/TSX Composite Index rose a modest 7.7 per cent in the same period, restrained by flagging commodity prices, especially energy. Still, in a low inflation world, that’s not a bad one-year gain in a very troubled world.

The future is not quite so bright. Inflation, the driver and indicator of such things as national gross domestic product figures, is low in the big industrial countries where it matters. Canada’s Consumer Price Index is up 1.9 per cent on an annualized basis as of April 30.

Low inflation is not a bad thing. It makes debts easier to pay in devalued dollars, in effect giving borrowers credit to buy and borrow more. With low single digit inflation rates, borrowing is cheap and repayment relatively painless.

Not surprisingly, Canada is tapped out. Lousy retail sales and shrinking margins show it.

Canadian household debt at the end of 2016 was a worrisome 167.3 per cent of income, according to Reuters. That means we owe $167.30 for every $100 of pre-tax income — that means we own about two bucks for every dollar left over after income taxes. Consumer spending drives much of the economy; it’s become weak according, to many Bank of Canada warnings.

Perhaps because bonds pay so little and perhaps because there is so much cash sloshing around after nine years of recovery from the crash of 2008, our stock market is doing moderately well.

The solutions

What’s an off-farm investor to do? The short answer is be very cautious about the market in general. These days, tempted by exceptional results from Alphabet (formerly Google), Amazon.com Inc., and Apple Inc., investors are chasing tech industry returns. The latest exchange traded fund to hit the market is the PowerShares QQQ Trust Series 1 ETF, a fund which tracks the NASDAQ 100 index that is heavy with Amazon and Netflix and other megatechs.

Within days of the fund’s launch at the end of May, investors poured in US$1.78 billion, a strong indication that they think the tech boom will continue, regardless of U.S. tax policy or trade relations. In this topsy turvy world, tech stocks, formerly regarded as high risk (remember the dot coms 17 year ago?) are now seen as safe compared to resources whose prices gyrate with the world economy and manufacturers whose fate is tied to tariffs.

In Canada, the counterpart to the American tech boom is centered on the pending legalization of marijuana. There are fortunes being made as companies transition from penny stocks to mid-caps, but it’s a perilous path to invest in the legalization of recreational drugs. The market is wavering.

Shares in Canopy Growth Corp., a leading player in this emerging agricultural sector, recently traded at $6.80, down from $13 in February. Another marijuana stock, Aurora Cannabis Inc., was down from about $3 in November 2016 to $2 in early June. Cannabis Wheaton Income Corp., shares of which sold for pennies a few months ago, rose to $1.50 in May and settled at $0.98 in June. Cannabis Wheaton may do very nicely, or not, but it is at least as risky as the dot coms, which never had to face a problem of legality or environmental regulation that could seek to protect moose from being intoxicated if they graze on fields of dope. A new world of regulation lies ahead.

The cannabis companies have to compete in a market in which people can (legally or otherwise) grow their own product. There will be a mass of new regulatory hurdles, such as pesticide residues and chemical components, far beyond the elimination of criminal penalties for use or possession. Legal marijuana may be the future, but caution is essential. Pricing these companies’ shares is a witches’ brew of valuation, information on market share, and clarity of legality.

Investors who want to improve the ratio of probable gain to probable loss should stick with companies whose stocks offer dependable dividends based on strong earnings. The dividends are paid in good times and bad, helping with the psychological problem of wanting to sell a stock bleeding red ink. The instinct to flee danger is often stronger than confidence in the probability that good stocks will rise again.

Among the stalwarts of dividend payers are chartered banks. Their earnings and dividends grow with the ever-expanding money supply. Then there are non-bank financial companies such as Power Corporation and Power Financial Corporation. They have dependable and rising dividends and deeply entrenched lines of business in insurance and other financial services. As sources of non-bank dividends, they are worth a look, even though their trends are uninspiring. What makes up for their moribund stock price is the five per cent dividend each offers. Even if dividends don’t rise, this will give you a 100 per cent gain in 14 years if held in an RRSP.

In the end, stock investing is a spectrum of risk that moves from buying sure things, like dividends from major chartered banks, to buying dreams and schemes from novelties in the dope biz. You cannot make 100 per cent overnight in a chartered bank stock, but you could do it or at least could have done it with microcap marijuana companies headed for listing on the TSX. But the risk of loss is far higher in these fields of fancy than in dreary but relatively safe old industries.

Off-farm investing is supposed to spread risk and produce alternative income. Investing in any agricultural commodity whether banal like turnips or exotic like marijuana is not really diversifying. Farming is a high-risk business. Diversification should mean that money earned on the farm is safe and profitable somewhere else. In the choice between bravery in the unknown and patience with the proven, I’ll stick with the old reliables that are legal, profitable, and ooze cash.

About the author

Columnist

Andrew Allentuck is the author of 'When Can I Retire? Planning Your Financial Future After Work' (Penguin, 2011).

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