Why it matters: The escalating conflict in Iran and surrounding Mideast countries is causing large price swings in energy, currency and equity markets, with that activity spilling into the fertilizer and agricultural markets.

Crude oil futures in London and New York soared almost 30 per cent in early trading to nearly $120 a barrel, one ofthe biggest one-day jumps on record, threatening to raise costs of products from gasoline to jet fuel. The prices then pulled back, with U.S. crude up 7.72 per cent at $97.92 a barrel and Brent at $100.56 per barrel, up 8.49 per cent on the day.

Investor jitters over soaring energy prices meant a wave of global stock and bond market selling which hung over the Wall Street open. In early trading, the Dow Jones Industrial Average 1.4 per cent, the S&P 500 dropped 1.26 per cent, and the Nasdaq Composite slid 1.16 per cent.

Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as Supreme Leader, signalling that hardliners remained firmly in charge a week into the war with the U.S. and Israel.

That was unlikely to be welcomed by U.S. President Donald Trump, who had declared the son “unacceptable.”

With hostilities continuing in the Middle East and tankers unable to cross the Strait of Hormuz amid the threat of Iranian drone attacks, investors were bracing for a long stretch of higher energy costs.

Investors awaited Washington’s response, said Helima Croft, head of global commodity strategy at RBC Capital Markets. “With no clear definition of what winning looks like, it is hard to forecast whether this will be a multi-week or multi-month conflict.”

GLOBAL MARKETS SINK

European shares tumbled to their lowest in more than two months on Monday, with the pan-European STOXX 600 down 1.76 per cent in a third session of losses. The benchmark index shed 5.5 per cent last week, its worst weekly performance in nearly a year.

The oil price spike was sobering for major oil importers in Asian markets, with Japan’s Nikkei .N225 closing down 5.2 per cent after a 5.5 per cent drop.

China, another big oil importer albeit with a huge stockpile of crude, saw its blue-chip index fall roughly one per cent. China on Monday said inflation had already picked up in February before the current oil surge, with consumer prices rising 1.3 per cent on the year, not necessarily a negative development, given the country has long struggled with disinflation.

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note on Monday that the U.S. equity market may still seem placid but there are “extreme” rotations and stock dispersions beneath the surface.

“Over the past 80 years, war-induced oil shocks have not been kind to equities, as nearly every episode has catalyzed a recession and market sell-off,” Shalett wrote.

CENTRAL BANKS FACE INFLATION CONUNDRUM

In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. Yields on 10-year Treasury notes rose 2.6 basis points to 4.158 per cent, up from a trough of 3.926 per cent just a week ago.

Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, though disappointing U.S. jobs numbers seemed to argue for stimulus.

Data on U.S. consumer prices due on Wednesday is forecast to show the annual rate holding at 2.4 per cent in February.

The Fed’s preferred measure of core inflation due on Friday is forecast to hold at 3.0 per cent, well above the central bank’s two per cent target, and analysts see a risk of an even higher number.

The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.

For the Bank of England, markets have shifted to pricing just a 40 per cent chance of one more easing, compared with two cuts or more before the Middle East conflict started.

Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.

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Peter Lynch isn’t a household name such as Warren Buffett, but he holds significant renown within investor circles. During his 13 years (1977-90) managing the Fidelity Magellan Mutual Fund, he achieved 29.2 per cent annual returns, almost doubling the 15.8 annual gains of the S&P 500. It was a good time to be in stocks and predates when I seriously started my own stock investing journey. A $10,000 investment at the start of his tenure would have become $280,000 by the end. He has authored numerous books.

Despite his extraordinary success managing the fund, many investors in the fund were known to have lost money, as they chased performance after years of big gains and sold during inevitable times of weakness. “With stock investing the stomach is a more important organ than the brain.”

Here is his list of his 10 most dangerous things people say (or think):

1

“It’s gone down so much already it can’t possibly go lower.” I addressed this common fallacy in my most recent article with data outlining median drawdowns of individual stocks, and how it is normal for a stock to experience a decline of 50 to 95 per cent. Some go to zero.

2

“It’s gone so high, how can it go higher?” While there is a limit on how low a stock can go (zero), there is no upside limit, as the current Magnificent Seven (Mag 7) demonstrate.

3

“Eventually they always come back.” The data in my last column showed that after a sell-off, approximately half of stocks never make their previous high.

4

“It’s three bucks, how much can I lose?” You can lose 100 per cent of whatever you invest. Question: If Investor A buys 200 shares of a $50 stock ($10,000), and the stock drops to $3, when Investor B buys 6,000 shares ($18,000) and the stock goes to zero, who loses the most money? The share price has nothing to do with how much you can gain or lose in totality.

5

“It’s always darkest before the dawn.” That is normally true, but it’s important to understand that it’s also “always darkest before it gets pitch black.”

6

“The business can’t possibly get worse.” As with share prices, business can always get better and can always get worse. Who would have thought oil could go to minus $30 — but it did during COVID.

7

“When it gets back to what I paid, I’ll sell.” I will admit having succumbed to this sentiment. It is always best to defer to current financials and business prospects. Mistakes happen in this business as in all businesses.

8

“I don’t have to worry; I own conservative stocks.” While generally true, specifically it can be very wrong, as the recent 50 per cent losses in Bell Canada and Telus illustrate.

9

“Look at all the money I lost NOT buying…” Opportunity cost is always present, but as illustrated a couple of columns ago, I have done very well while missing most of the Mag 7. Regret is one of the emotions we need to constantly fight.

10

“I missed [insert hot stock name here — Nvidia, for example], I’ll catch the next one.” Stocks promoted as “the next [insert same stock name here]” are often duds. Finding the next one is akin to the proverbial needle in a haystack. Avoid longshots, at least until they prove to be viable companies.

11 (bonus)

“The stock has gone up, I must have been right” or “the stock has gone down, I must have been wrong.” Short-term stock movement is random. Only after a couple-year period will you know whether the purchase decision was right or wrong. It is important to distinguish luck from skill.

It is fair to say that most investors will think or say these things frequently. They all have some logic to them, but as history has demonstrated, they can be dangerous thoughts.

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In this environment it is, however, best to prepare ourselves for the inevitable bear market, whenever it might arrive. Rest assured, it will arrive! We just don’t know when.

One of the most difficult yet important aspects to understand is that even the best companies periodically experience significant drawdowns — sometimes on their own volition, sometimes as part of a greater market meltdown. The data presented in this article is from an excellent study published in May by Morgan Stanley, titled, “Drawdowns and Recoveries: Base Rates for Bottoms and Bounces.” The U.S.-based study was conducted by an Arizona State University professor and went back a full century, reviewing about 28,600 companies listed in the U.S. during that time; however, most of what I will reference is from the 40-year period between 1985 and 2024.

Firstly, it is important to understand the difference between median and average. The average is, as we all know, the numerical average of all data points. The median number represents a level where half of stocks performed better and half performed worse. Median is important because the average can be skewed by a few outliers such as Amazon and Nvidia.

Interestingly, going back a full century, 60 per cent of corporations failed to match the returns of Treasury bills, meaning 40 per cent represented the entire wealth creation of the market, with a dramatic skew toward the current list of tech heavyweights. Yet, the top six stocks in wealth creation have, on average, experienced declines of 80 per cent at some point in their history. For example, Amazon declined 95 and Nvidia 90 per cent in the wake of the dotcom bubble 25 years ago yet rallied back to reach their current astronomical $2.5 trillion and $4.2 trillion market caps.

This decline-and-rally behaviour is not unique. In fact, from 1985 to 2024, the median stock experienced a drawdown of 85.4 per cent, lasting 2.5 years, and recovered to 89.6 per cent of previous peak, lasting 2.5 years as well. This means slightly over half the stocks never reached their previous peak. The average stock experienced a decline of 80.7 per cent lasting 3.9 years and rallied back over the next 3.8 years to 338.5 per cent of its previous peak. In simple words, if you see a stock drop dramatically, there is about a 50:50 chance that stock will never hit its previous peak, but those that do can perform extremely well. Generally speaking, the time of decline equals the rally time to next peak.

The larger the drawdown, the less likely a stock will recover to its previous high. Twenty-eight per cent of stocks experienced a decline of 95 per cent or greater, with only 16 per cent of them rallying back to previous high. Forty per cent of stocks experienced declines of 75-95 per cent, with slightly less than half reaching their previous peak. Twenty-six per cent declined 50-75 per cent, with over two-thirds of them reaching their previous high. Astonishingly, only seven per cent of stocks experienced a decline less than 50 per cent and as you would expect, most (80 per cent) went on to achieve their previous high.

Looking forward

That’s not to say money can’t be made on stocks after they experience precipitous declines. A stock that declines 90 per cent and goes on to achieve half its previous peak returns 400 per cent from the bottom. Forward returns were indeed best for stocks that had fallen the most, based on selecting survivors from this group, and recognizing how rare it is to nail a stock’s actual bottom. It’s better to wait for a modest recovery.

What surprised me in the report was how few stocks had declines of less than 50 per cent, and how normal it was to experience declines in excess of 75 per cent or more. If we wish to succeed with stocks, it is important to prepare ourselves mentally for this volatility. While most of the big declines will occur during a major bear market, such as the 2008-09 financial crisis, they can occur independently. This clearly demonstrates the importance of broad diversification, as I have emphasized many times. Understanding that dramatic drawdowns are the norm should help in our behaviour as we experience them in our portfolios.

Investing is both an art and a science. Figuring out which companies will survive and then thrive after a major sell-off is difficult. The science part lies in the financials, and the art part — well, that’s the art part.

The stock market provides vastly superior returns over other investing mediums, in part because of the volatility it experiences. Stomaching, and with experience relishing, the volatility is important to our individual success.

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While I have discontinued the newsletter, I continue to manage the account similarly. Deposits were made from July 2015 to November 2022, when they were capped. The average time of capital employed was just under 95 months, or eight years, when the value of the portfolio crossed the quadrupling line in August of this year. Using the “Rule of 72,” we can quickly calculate that doubling in four years, twice, represents a compound annual growth rate of 18 per cent. Caveat: There is no guarantee the portfolio will stay above the line in the future, but my track record has been pretty good at absorbing the blows the market perpetually provides.

I thought it would be worth digging into the various mistakes and successes in the portfolio to help those of you actively managing your own funds to learn from my activity and compare with yours.

Mistakes

One: Sixty-three per cent of the funds deposited went into the Canadian side of the portfolio and only 37 per cent into the U.S. dollar-denominated (USD) side. Part of the USD funds were used for international exchange-traded funds (ETFs), such that only about 30 per cent of assets were invested in the U.S. The U.S. market has significantly outperformed both Canadian and international markets, leaving me invested largely in underperforming markets.

Two: The only company in the portfolio that was part of what’s now referred to as the “Magnificent 7” is Alphabet. These seven companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) now represent 34 per cent of the value of the entire S&P 500, with the other 493 companies representing 66 per cent. I effectively missed the boat on the rapidly rising share prices of these companies.

Three: My most significant stock failure was the collapse of the infamous Silicon Valley Bank in 2023. I lost my entire US$6,000 investment. What was more chilling was the stock tripled very quickly after I bought it. I thought about selling but didn’t. By my math it was significantly overvalued, but I didn’t sell because it was one of the few companies related to the tech field. I could have made a great profit! Mistakes happen, and we must learn from them but not dwell upon them. Sell when a stock becomes significantly overvalued.

Four: Other notable losses included MKS Instruments, where I lost over 50 per cent after they made a disastrous company acquisition. I lost 50 per cent on Walgreens Boots Alliance and 30 per cent on Corus Entertainment. Both represent proverbial “value traps” — companies that look like great values but have deteriorating long-term fundamentals. Value investors, such as myself, need to be wary of potential “value traps.”

Five: Two of the biggest losers I am currently holding are the alternative energy stocks I wrote about in an article related to this topic. Albemarle, a lithium company, is down about 50 per cent and Enphase, a solar company, is down about 75 per cent.

A few things I did correctly

One: A couple of my best successes were Canadian companies. I purchased 300 shares of TFI International back in 2016 and sold 100 after they tripled and another 100 after they quintupled. I still hold 100. Cameco was another big winner that I purchased for $12 in 2016. I sold half after it tripled and another half recently at seven times the purchase price. I also had a triple on Teck Resources and U.S.-based home furniture retailer Williams Sonoma.

Two: Of all the completed stock trades over the decade, 66 per cent have been positive. Of all the current stock positions, almost 80 per cent are positive. That’s a solid batting average. The great thing about investing in stocks is the biggest loss you can take is 100 per cent, yet there is no per cent limit on the upside. To date I have experienced one 100-per-cent loss and thirteen 100-per-cent-plus gains, with the largest being 606 per cent. Of my current stock positions there are zero 100-per-cent losses and eleven 100-per-cent-plus gains, with five that are triple or better.

Three: I divide the market into 17 different industries and always have one or more stocks from each industry, usually one Canadian and one U.S. stock per industry. My portfolio is therefore broadly diversified. This may mute the upside when one industry rallies big, as tech has, but it also provides downside protection and keeps me from panicking when market air pockets occur. I always start with foundational companies like financials and railroads, then complement these with more growth-oriented companies. I am dividend-agnostic in taxable accounts, preferring dividends in tax-protected accounts.

Four: A big part of the portfolio success comes from combining both stocks and options. All the above examples relate to the stock part of the portfolio. In the next column I will delve into the option portion.

I hope this summary helps and motivates you to look at overall portfolio performance and gives some benchmarks on percentage wins versus mistakes. It demonstrates very clearly that you don’t need to get everything right to be successful.

The post Smashes and setbacks line the path to a successful investment portfolio appeared first on Grainews.

The most important positive factor was valuation – basically, how expensive a stock is compared to the money it earns. The study broke all the factors into 5-year periods, and interestingly, valuation was more important from 1975 to 2005 than from 2005 to today. I would suggest historically low interest rates for much of the past 20 years reduced the importance of valuation to investors, making high valuation/speculative stocks more enticing. As we enter an era with more realistic interest rates, valuation could again increase in importance.

Interestingly, the second most important factor was momentum. Stocks with a chart moving upwards and to the right do better than market averages. This is somewhat contradictory to the above, as better valuation often comes after a stock sells off.

However, an investor must always be aware that a sell-off isn’t always temporary. It could also be a longer-term reduction in company performance from external events, technological obsolescence (buggy whips) or internal management issues.

Watching momentum can help avoid what are referred to as “value traps.” Stocks that look cheap but may be permanently impaired. My preference is to buy after a short-term market sell-off, such as occurred last spring, that doesn’t break a company’s upward momentum.

The third and fourth positive factors – quality and profitability – are closely linked. Quality was defined as gross profit over assets, and profitability as Return on Equity (ROE), Return on Assets (ROA), and Return on Invested Capital (ROIC). I prefer the cash flow/assets profitability metric for simplicity while also reviewing ROE and ROA. These factors measure how efficiently a company uses capital.

Valuation and profitability factors reinforce my overall view of looking for companies with high profitability (capital efficiency) and modest valuation. Adding upward momentum to the criteria is worth considering.

The negatives

The most negative factor was growth in assets, which supports the positive impact of capital efficiency. The stocks of companies that require high capital expenditures to purchase depreciable assets are more prone to underperformance.

The other negative factors were turnover, defined as heavy trading volume relative to number of shares, company size, and share price volatility. Interestingly, while valuation was less positive recently, company size and share price volatility have become more positive. Traditionally, these are negative factors, which raise the question of whether this is an anomaly or a longer-term trend.

Historically, size has been negative, because as a company grows, it becomes more difficult to maintain the same percentage of revenue and profit growth. However, technology is easily scaled, allowing mega tech companies to defy this general principle, increasing sales and profits faster than other large companies. That being said, it is worth reflecting on what are considered the four most dangerous words: This time is different.

No impact

Four factors that had no impact on total returns were leverage, earnings volatility, growth, and dividend yield. Some may be surprised that dividends have no impact on returns, but stock movement relates to company performance or anticipated company performance, not if and how returns are distributed to shareholders. Being relatively ambivalent to dividends, I simply place high dividend earners in tax-advantaged accounts and those with lower dividends in taxable accounts.

The surprise to me was that historical growth in sales and net income didn’t impact forward returns. The only explanation for that is that markets already price in expected growth — if those expectations aren’t met, the share price often declines. If the market thinks a stock will grow 10 per cent per year but it only grows five per cent, it is likely to decline.

How will this study impact my purchase decisions? It largely reinforces my past strategy of combining profitability with valuation criteria. I will try to pay more attention to upward momentum rather than dumpster dive for low valuations, but I suspect the bargain hunter in me will periodically prevail.

The post What factors historically boost stock returns? appeared first on Grainews.

A recent article appearing in Juno News stated that foreigners are divesting Canadian assets while Canadians are investing more in foreign securities, a double whammy to Canadian investments. A direct quote was, “The result of these dual movements — a retreat by foreign investors and an outward push by Canadian ones — was a net outflow of $16.2 billion from the Canadian economy in May.” A similar article appeared in the Financial Post with a chart exhibiting year-to-date outflows from Canadians to U.S. securities, both stocks and bonds, of $59.9 billion. In half a year there were more outflows than any full-year period dating as far back as 1990. The government may be experiencing a honeymoon period with voters but not with investors.

Additionally, during second-quarter earnings calls, both our largest midstream pipeline companies, Enbridge and TC Energy, discussed future investments. The comments were widely reported with a headline in the Edmonton Journal reading, “Despite pipeline hopes, Enbridge, TC Energy see strong demand in U.S., hurdles in Canada,” summarizing the sentiment. Despite political verbiage supporting major development projects, past legislation stands in the way.

While I generally like being lonelier making investment decisions, in this case it looks like the sentiment I experienced immediately after the election was mirrored by others — the main difference being I am looking outside Canada and the U.S., while it appears most others are focused on U.S. investments.

To free up cash to buy more foreign securities, I made two significant sales, one in Canada and one in the U.S. Both are examples of my minimal turnover approach. In a taxable account I sold Bank of Montreal (BMO). The shares were purchased in July 2015 and March 2020 for an average holding period of about 7.5 years. I sold for slightly more than twice what I paid, and with accumulated dividends made 163 per cent total return. While overall BMO is fine compared to other Canadian banks, it has one of the lowest return on equity (ROE) ratios of 9.8 and trades with an above-average price earnings (P/E) ratio of 14.4. I like to see the ROE above the P/E.

In my RRSP I sold half my position in U.S. bank JPMorgan Chase (JPM). I purchased the shares in 2003 for a 22-year holding period, paying $20.46 per share. I sold for $286.39 per share, and a 1,300 per cent capital gain. Add in $46.34 of accumulated dividends (based on the charts on my brokerage website) for a total return of $312.27 on $20.46 invested. Contrary to BMO, JPM has an excellent bank ROE of 16.9 with a P/E of 14.9, which is why I kept half the shares. JPM has been one of the best-performing banks in the world. Its famous CEO Jamie Dimon is, however, 69 years of age and not everyone is as timeless as Warren Buffett. While I have not used cash from this sale, it frees up capital for other foreign opportunities.

I purchased four different Canadian currency-based foreign ETFs (exchange-traded funds). I am a relative rookie at ETFs and used my internet website’s ETF sorting tool to buy the highest-performance funds. I added one emerging-market fund and one developed-market fund to both my RRSP and taxable account.

I selected ticker FCIM, which had the best three-year performance, and VXM, which had the best five-year performance for the developed-markets funds, putting the highest dividend payer into the RRSP.

I selected ticker DRFE, which has the best three-year performance of the emerging-market funds, for the taxable account, and REM, which has the fourth-best five-year performance record and sports a high dividend for my RRSP.

Past performance doesn’t guarantee future performance, but the probability is better.

While I am not exactly sure how taxes work on ETFs, in general there will be withholding tax on dividends paid by companies to the ETF, but when dividends are paid from the ETF to individual investors, if in a tax-sheltered account, those dividends should be tax-free. I will learn more as I become familiar with this investment tool.

Studying ETF performance for the first time, I was surprised by the wide range of performance across funds that are similarly focused. Three-year performance for the emerging-market funds ranged from 16.25 to 1.72 per cent per year, while the five-year performance ranged from 11.7 to 3.44 per cent. Developed-market funds’ three-year performance ranged from 27.06 to 10.74 per cent, while the five-year performance ranged from 19.11 to 7.21 per cent. Three-year performance figures look outstanding because we were in the midst of a bear market in 2022. With myriads of choices, my focus was on long-term performance while also considering the average P/E of the fund and, to a lesser extent, dividend yield and the Morningstar rating.

Overall, I only have about five per cent exposure to international markets and will continue to evaluate opportunities with a plan to double, if not quadruple, this level of exposure over the next few years.

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It has doubled in seven years, which, using the Rule of 72, equates to a 10.3 per cent compound annual growth rate. The dividend reinvestment decisions are all listed in the table shown here. The only new positions added were the iShares S&P/TSX Capped Energy Index ETF (TSX: XEG) at the bottom of the COVID crash, and South Bow Corp. (TSX: SOBO) which was a TRP spinoff. Otherwise, dividends went to adding to existing positions.

Over those seven years, the S&P 500 experienced four declines of 20 per cent or more, which defines a bear market. The 2018 decline was blamed on Trump tariffs and trade war No. 1. The COVID crash followed in 2020, then in 2022 we had a dramatic spike in interest rates coupled with an end of the 2021 speculative fervour, and in 2025 we have once again experienced a rapid decline and recovery due to Trump tariffs and trade war No. 2, although we still don’t know if the current one is truly over. Bear markets normally occur about once every four to five years, and having four in a seven-year period is highly unusual — although these all tended to be modest bears with quick recoveries.

The Canadian market mirrored the U.S., but didn’t quite hit the 20 per cent drawdown level, except during the COVID crash. Its overall market performance has been weaker but more stable.

What we’ve learned

• “Activity is the enemy of investment returns,” Warren Buffett is said to have said. This axiom naturally depends on good stock selection to begin with.
• An investor cannot — I repeat, cannot — pick the tops and the bottoms of these market drawdowns. One key to success is understanding and accepting they are going to happen but not reacting when they do, other than to look for bargains. This point also depends on good stock selection to begin with.
• An investor does not need to chase hot stocks to get good returns. If Nvidia or Apple were in the portfolio, it would have done better; however, the purpose of the portfolio was to demonstrate excellent returns with minimal effort, rather than to maximize returns.
• You can’t predict at the outset which stock will perform the best. If you could, you would invest in just that stock. The normal distribution curve (the bell curve) will always come into play.
• You can’t predict which stock will be the worst performer. A while back I wrote about my concern with declining profitability in the telecom sector. However, I would have never predicted seven years ago that Bell would slash its dividend in half, which it recently did. That said, having 12 out of 13 positions in the green is admirable.

I hope following this portfolio for seven years has helped with your investment decisions.

On another note, further to “The economic trouble with Canada” (Grainews, May 6, page 18): the Fraser Institute just published an analysis of Canadian public-sector expenditures and debt, compared to other developed countries, and once again our performance is abysmal. Over the past decade public sector expenditures, both federal and provincial, have grown from 38.4 to 44.7 per cent of gross domestic product (GDP), the second-worst performance of 40 countries. Our total debt has grown from 85.5 to 110.8 per cent of GDP, the third-most growth of the 40 countries. Recent provincial budget announcements will only exacerbate this performance, and the federal government has pledged to expand expenditures but won’t yet release a budget. Why we continue to elect profligate governments is beyond my comprehension. Burdening future generations will not fix today’s problems.

On top of declining business investment, declining per-capita GDP and rapidly increasing public-sector employment compared to private-sector, we now have the fourth splintered leg of our wobbly economic chair, being debt and deficits. These all occurred prior to current trade disputes, which will also be impactful.

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Two issues ago, I bemoaned how the past mainstays of a Canadian portfolio, banks and telecoms, experienced declining profitability and share prices for an extended period. The last issue discussed the dominance of U.S. technology and noted that, being value-oriented, we had just modest exposure to this sector. Yet our portfolios have continued to perform despite these handicaps.

To maintain performance, I pivoted to smaller companies with good valuations and invested in energy when the world had forsaken it. The first couple examples are a combination of those two themes. In 2021 I made a small investment in CES Energy Services (TSX: CEU) at about $1.50 per share. It has quintupled in three years, making it a more substantial investment. I continue to hold as it sports reasonable valuations with a price to earnings (P/E) of 10.6 and price to cash flow (P/CF) of 6.0. It produces chemicals and fluids for all aspects of energy production and transportation.

Another small energy service company I purchased in 2021 was Computer Modelling (TSX: CMG). It has more than doubled in three years, and I recently sold half. It provides software and consulting for reservoir maximization.

Moving off the energy theme, I have had some success with smaller Canadian tech companies. I have owned Vitalhub (TSX: VHI) for two years, with a nice tripling of my purchase price. It provides tech solutions to the health industry. It is expensive from a valuation standpoint but growing rapidly. I have also had good results with Converge Technology (TSX: CTS), originally purchased for about $2.50 in 2020. I then sold one-third at over $10 in the speculative fervour of 2021 and recently added again at just under $5. While earnings are still elusive, it has superb cash flows.

Additional success has been derived from mid-tier companies. One of my biggest winners has been transportation company TFI International (TSX: TFII), which I have owned since 2017. Originally purchased for $23.80, it is now in the $200 range. Unfortunately, I sold two-thirds of my stake at about $80, and then at $130. Still nice gains, but holding would have been better. Convenience store operator Alimentation Couche-Tard (TSX: ATD) has been a good winner, more than doubling in three years, and engineering firm Stantec (TSX: STN) is up almost four times in six years.

Industrial company and generous dividend payer, Russel Metals (TSX: RUS) has delivered solid gains including dividends of 140 per cent in five years, and while the large midstream energy players get the press, I have done well with smaller Keyera (TSX: KEY). Again, including dividends, it has returned over 100 per cent in four years.

I hope these examples illustrate the value of holding until such a time as the stock no longer represents decent value. Many investors sell if they make 20 or 30 per cent.

None of the examples provided should be considered as advice to buy. They simply represent examples of how I maintained portfolio performance largely missing the top 10 U.S. companies and with poor performance of the traditional stalwarts, Canadian banks and telecoms.

I have picked all these examples from the Canadian side of my portfolios to illustrate that even with a weak investment climate, poor stock market performance and a faltering economy, good companies can be found. None of these companies are reliant on government largesse for their success. They simply go about their business, take care of customers and deliver returns to shareholders.

Speaking of a faltering economy, I believe Canada is on the precipice of recession. July numbers showed a decline of 42,000 employees in private-sector employment, while the public sector gained 41,000. This continues a decade-long trend of relatively stagnant private-sector growth but booming government growth. A decade ago, governments in Canada employed 22.8 per cent of workers, and today they employ 25. In 2014, 3.4 million Canadians worked for the government and there were 2.7 million self-employed entrepreneurs. Today governments employ 4.5 million and there are still 2.7 million self-employed. Over the past year government employment has grown eight times faster than in the private sector. (Source: BetterDwelling.com, Aug. 9, 2024.)

Despite insatiable government hiring, unemployment has grown from 4.9 to 6.4 per cent, and youth unemployment has hit a decade-high level, excluding COVID aberrations.

Recessions usually only officially get called about halfway through, when the data is certain. If overall we are not in recession, families with a declining standard of living and companies with declining employment certainly are, whereas governments are booming. The private sector carries the load, and the growing public sector is being carried by a shrinking private sector.

Yet, despite all the negativity in Canada, I continue to look for ways to “skin the cat.”

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The London Stock Exchange opened in 1773, followed closely by the New York Stock Exchange in 1792. The Toronto Stock Exchange opened its doors in 1861, shortly before the founding of Canada. Very few institutions have experienced the longevity of these exchanges, through all the manias, panics, wars, depressions, recessions, currency crises, political upheavals and so on.

In the short decade I have been writing about stock markets, we have experienced the first Russian invasion of Ukraine in 2014; the oil price crash in 2014-15; Greece’s default in 2015; Brexit in 2016; Trump’s China trade war in 2018; COVID-19 in 2020; a speculative mania in 2021 leading to the 2022 bear market; Russia’s second and more devastating invasion of Ukraine in 2022; the highest inflation in a half century in 2021-23; and Hamas atrocities in 2023. Each crisis caused a temporary market panic — “temporary” being the operative word — from which the market eventually recovered and went on to make new highs. At the time of writing the S&P 500 was in new record territory, while the TSX is still lagging but close to new highs.

Timeless lessons

In no way do I mean to belittle the horrific human tragedies of both Russian invasions of Ukraine or the Hamas atrocities. While as humans we care deeply about such tragedies, markets display relative indifference.

There are a number of timeless lessons reinforced by the most recent bear market and recovery:

• A panic can travel halfway around the world before optimism can get its shoes on. For this reason, it is said the markets take the elevator down and the stairs up, although there have been a couple recent examples where they took the elevator up too.
• Cynicism and fear have an appeal that positivity can never have. It is headlines of doom that get the most readership. Numerous newsletters and market prognosticators perpetually sell doom — and their secrets of how to avoid the coming crash. It is by no accident the No. 1 financial newsletter on newsletter amalgamator Substack is titled “Doomberg.” I personally find the peddling of doom highly distasteful, whether related to climate, GMOs, financial markets or any other doom-oriented circumstance such as the turn-of-the-millennium Y2K (remember that one?).
• Markets will embarrass the largest possible number of participants, economists and market forecasters at any given time. It’s not called “The Great Humiliator” for nothing.

COVID, and more importantly governments’ reaction to it, was truly a unique situation. However, to the markets it was just another in a long list of panics that occurred over time. The proliferation of special-purpose acquisition companies (SPACs), which I wrote about two years ago, was unique, but to the markets they were just another in a long list of speculative manias.

This leads to a list of investor truisms:

• You have to tolerate volatility, pain and uncertainty to earn superior returns the market offers. To quote Talking Heads’ 1980 song Once In A Lifetime: “Same as it ever was.”
• When sentiment is worst, and others are gripped with fear like at the beginning of 2023, opportunities are best. “Same as it ever was.”
• Highly profitable companies at reasonable valuations will make the best long-term investments. “Same as it ever was.”
• Our task as stock investors is to identify and buy those best opportunities. “Same as it ever was.”

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By “X” we don’t mean “formerly Twitter” — everybody has been writing “X (formerly Twitter)” so I thought I would do the opposite. In this case you’re welcome to fill in whatever you wish for X.

Salespeople often use the phrase to help sell products, especially new hot ones. Everybody uses the saying periodically, but of course we all know and accept that “everybody” is somewhat of an overstatement.

In the markets, when “everybody” is doing something, it often turns out to be the wrong thing, which raises the question: how could “everybody” be so wrong?

In recent articles I demonstrated the inaccuracy of analyst projections on specific stocks, and I compared Wall Street expert predictions to Calgary amateur predictions. Both were examples of “everybody” getting it wrong.

The stronger the consensus, the more wrong it usually becomes. The reason is simply that when “everybody” thinks the market is going down, they have already sold or at least trimmed their stock holdings and have higher levels of cash. Most market participants think, erroneously, they can predict market direction. If they have a negative view, they are busy selling, driving the market down. When pessimism reigns, “everybody” is out, and the market runs out of sellers.

The American Association of Individual Investors (AAII) publishes weekly investor sentiment data. On Sept. 22, 2022, the sentiment read 17.7 per cent bullish, 21.4 neutral, and 60.9 bearish, rivalling the worst sentiment of the great financial crisis of 2008-09. The 2022 bear market bottomed shortly thereafter.

At year-end, sentiment remained dour, with 20.3 per cent bullish, 27.4 neutral, and 52.3 bearish. Additionally, Wall Street experts were almost unanimously predicting a 2023 recession with declining stocks.

When “everybody” thinks the market is going down (and this was as close to everybody as “everybody” gets), it must go up. The reason is simple: few sellers remain. When investors like me, who plod along buying what looks like good value, continue to buy, the market starts to move up. Then, as it starts to move up, other investors become more optimistic and start to re-employ the cash they built while selling. The market moves up more; others see the boat they are missing and buy; then, speculators and fast-buck artists jump in, driving prices to a crescendo. Markets peak when there is strong positive sentiment and with “everybody” in, few new buyers remain.

This isn’t an exact science. It just so happens sentiment and the market both bottomed at the same time during the 2022 bear market and also the 2023 market correction. Sentiment was lowest on Nov. 2, 2023, with 24.3 per cent bullish, 25.4 neutral and 50.3 bearish, coincident with the beginning of one of the strongest November/December rallies ever. However, all-time highs in January 2022 were predated by a sentiment peak a full eight months earlier, when there were 56.9 per cent bullish, 22.7 neutral and 20.4 bearish. Bullish or bearish sentiment can stick around for quite a while. I think sentiment picks bottoms better than tops, but if there are more than 50 per cent bullish for a prolonged period, something bad is likely to happen.

Grating against ratings

Analyst ratings of stocks are more nuanced than overall market sentiment. Analysts generally give individual stocks a one to five rating titled Buy, Outperform, Hold, Underperform and Sell, providing target prices.

The same principles apply in that widely touted stocks can often fall, and vice versa. If an analyst recommends a stock, portfolio managers buy it. The more analysts with a buy rating, the more funds have the company in their portfolio. It’s not unusual to see a stock fall five to 10 per cent simply on the downgrade from a well-known analyst, and vice versa. If it’s rated a buy, there is only one way for the rating to go, and that’s down. The nuance is that different analysts cover different stocks, the number of analysts covering a stock varies widely, and strong stocks can have positive analyst ratings for a long time.

A clear example of going against analyst ratings was recently in buying office properties. Boston Properties is a large office real estate investment trust (REIT) in the U.S. It peaked at $147 before COVID, fell then recovered to $132 in March 2022, then fell again all the way to $50 in November 2022, as work-from-home and commercial real estate debt woes dominated the sound waves.

I sold a put option (a bullish move) on it immediately after a BNN commentator banged the table to “stay out of office properties.” I had completed my financial review and was going to make a move, but that was the trigger. I then quickly followed up buying a Canadian office REIT, Allied Properties, for my RRSP. Boston Properties is up 40 per cent and Allied 30 per cent in the last couple of months.

Clearly, I didn’t make these decisions on one commentator. His comment simply encapsulated the dour sentiment on office properties.

A real challenge is to read repeated negativity and act differently — and, once again, vice versa.

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