The cumulative value of those outstanding shares determines the overall value or market capitalization of a company. Of course, those numbers change daily as share prices rise and fall with normal market fluctuations.

WHY IT MATTERS: While Fortune 500-level companies are typically somewhat better insulated against market shocks, reduced market cap can make it more difficult for publicly traded firms to obtain favourable credit or raise capital through share offerings.

Those fluctuations are the result of profits each company reports and the outlook on their future fortunes along with the condition of the overall economy.

In recent days, however, there is another consideration to factor into those market trends: the war in Iran. That gambit, initiated by the Trump administration and Israel’s leadership, has roiled markets around the world.

The U.S. Dow Jones had been riding pretty high despite a global economy upended by U.S. tariff policy.

The Dow had reached a yearly high average on Feb. 10 of more than 50,000. However, the Middle East war cratered it, causing the average to drop to slightly more than 46,000 by March 25. Almost every other market around the world saw significant declines as well.

At the same time, oil prices have reached higher than US$100 per barrel as global supply is choked down by roughly 20 per cent due to the closure of the Strait of Hormuz, impacting urea fertilizer prices as well.

All of this has affected the input costs farmers will face this year, but it has also had a negative impact on the market value of farm machinery manufacturers.

As their profitability and share prices were starting to rise from a low point in the cyclical equipment demand cycle, the stock market declines have caused significant reductions in the valuation of those companies.

Here’s a look at just how much the market capitalization of those brands had fallen from mid-February to late March:

• John Deere shares peaked just before the war on Feb. 24 at US$664. By March 25, those share values had dropped $82. With about 270.1 million shares outstanding, that represents a market capitalization loss of roughly $22 billion.
• Agco shares peaked Feb. 13, and by March 25 had seen a $1.7 billion valuation reduction.
• CNH Industrial, parent company of Case IH and New Holland, realized a $2.5 billion decline.
• In the automotive sector, the story is the same. For example, Ford saw its market value decline by more than $8 billion.

The situation is the same for nearly all publicly traded companies listed on many different stock exchanges around the world, meaning globally, companies collectively have probably lost trillions of dollars in market value, at least temporarily.

At the same time, financial analysts are sounding the alarm over the possibility of insider trading on the U.S. stock market related to government announcements, with unusual trading patterns observed that could have netted millions for unidentified entities just minutes before a White House announcement.

More than a few analysts are now questioning the integrity of the U.S. stock market as a result. Since the current administration took office, the ability of the U.S. Securities and Exchange Commission to prosecute violations has reportedly been significantly reduced.

This comes at a time when foreign investment in U.S. government treasury bonds is declining, reportedly due to a lack of confidence in the administration. Those bonds help finance the government’s deficit. Without continued investment, the U.S. treasury will find itself in a bind.

Add to that the recent increase in global oil trades conducted in yuan, rather than the standard U.S. dollar transaction, which came to be known as the petro-dollar.

The so-called petro-dollar has helped prop up demand for U.S. currency for decades. That has been an economic boon for the United States, but the continued decline in U.S.-dollar oil transactions would lead to significantly reduced demand for greenbacks.

As a lack of confidence in the U.S. among investors, trading partners and allies grows, there could be a very rocky road ahead for the U.S. economy, and the valuations of U.S.-based corporations could continue to take a beating.

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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.

The post Managing through market or individual stock declines appeared first on Grainews.

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.

The post The Titanium Strength Portfolio keeps plugging along appeared first on Grainews.

My always-accurate first prediction was that most predictions would be wrong. This was, once again, right on the money! Wall Street average analyst predictions were for a slight S&P 500 gain of two per cent. This was their second horrific miss in a row, as their 2023 predictions were for a loss of two per cent, whereas there was an even bigger gain of 26.3 per cent. In 2023 I had predicted a 15-20 per cent gain, and in 2024 a five to 10 per cent gain.

While my projections turned out conservative, they were vastly better than the pros. Interestingly, having missed the boat for two years, Wall Streeters are gaining optimism for 2025, projecting a 14 per cent gain.

My second prediction was that Canada would experience a recession while the U.S. would not. While no recession has been officially called in Canada, it is clear people are in recession with a declining standard of living, and businesses are in recession with declining capital investment. There are two factors keeping Canada out of official recession: excessive government spending, with the vast majority of new employment being in the public sector, and dramatic increases in immigration. The U.S. economy remains robust; however, excessive government spending is also concerning.

I predicted interest rates would not decrease as much as expected, and that the Bank of Canada would be hamstrung in responding to our weak economy because of an already-weak currency. The prediction was very accurate for the U.S., where the Fed dropped the overnight rate one percentage point rather than the predicted 1.7 points. Additionally, longer-term rates actually increased, exiting the year above where they started. The 30-year treasury rate increased from 4.03 to 4.79 per cent, the 10-year from 3.88 to 4.57, and the five-year from 3.84 to 4.38.

The Bank of Canada overnight lending rate declined as expected, in total disregard to the value of our currency, with the Canadian dollar exiting the year at its lowest level in over 20 years. Our longer-term rates, however, didn’t move much, with the 30-year rate increasing slightly, the 10-year rate exiting the year exactly where it started at 3.25 per cent, and the five-year rate dropping slightly. Short-term rates are set by central banks and long-term rates by the market.

In summary, all these predictions were fairly accurate. I missed, however, my expectation of higher energy prices, with oil exiting the year about where it started, and natural gas increasing only modestly.

Now, for 2025

Fearless Prediction 1: Most predictions will be wrong, again. This one is just too easy to make.

Fearless Prediction 2: An official recession will be called in Canada, and the U.S. economy will slow down.

Fearless Prediction 3: I continue to believe energy prices will recover, and contrary to the majority of current opinion they will trend upward rather than downward. I wouldn’t be surprised to see oil hit $90 and natural gas hit $5 during the year.

Fearless Prediction 4: We will see an uptick in inflation, despite slowing economies. This will once again restrain the expected decline in interest rates.

Fearless Prediction 5: Now that Wall Street analysts are optimistic, I have become more pessimistic. I think we will experience significantly more market volatility than during the last two years, with the S&P 500 exiting with a modest gain of around five per cent and lots of roller-coaster activity along the way. Despite my Canadian recession call, I think our stocks will perform better, with perhaps a 10 per cent gain. The TSX has lower current valuations and investors will begin to factor in regime change in Ottawa.

As always, my main caveat to these predictions is Prediction 1, and they will have minimal impact on how I invest. Given the unpredictability of the market, I have found it advantageous to stay fully invested, find the best bargains at the time, and ride the volatility. Think of the returns missed over the last two years by those who listened to the dire predictions.

Significantly more important than fun with predictions is how our portfolios performed. I would encourage everyone with investments to evaluate their performance by examining the value of portfolios at the beginning and end of 2024, considering deposits or withdrawals made. Were they in line with market performance? All our family portfolios fell in the range of 18 to 33 per cent. The portfolio set up for my now defunct newsletter was up 22.4 per cent and carries a nine-year compound record of 18.2 per cent, illustrating the earnings potential in the market.

The Titanium Strength Model Portfolio gained 23.6 per cent and is now up 94.3 per cent in 6.5 years. It continues to hold all positions from start-up. There is one new company, South Bow Corp. (SOBO), which was spun out of TC Energy (TRP). One share was awarded for every five shares of TRP owned. It caused a minor adjustment to the purchase price of TRP, as some cost is allocated to SOBO. I will use accumulated dividends to add 60 shares of XEG, 10 shares of CNR and 2 shares of BRK.B at year-end prices.

I hope everyone had a prosperous 2024 and offer my best wishes in what lies ahead, as unpredictable as it is!

The post A spectacular 2024 defied predictions, again appeared first on Grainews.

Another year has come and gone, and I wanted to verify or refute last year’s observations. I was less surprised by the results this year as they mirrored last year’s pathetic accuracy.

Like last year, I compared the top three-rated companies with the bottom three-rated companies within a sector. The chart also includes an average for the entire sector, but with those averages large errors on the positive side are often offset by large errors on the negative side.

Last year, the bottom three-rated companies outperformed the top three-rated companies in five out of 11 sectors. This year, only four sectors had the bottom three outperform the top three but two more were effectively tied. Even where the top three performed better than the bottom three, there was often a huge gap between expected returns and actual returns. In communication services, for one, the average expected return was 40.4 per cent and the actual return was 2.3 per cent.

The prize for inaccuracy on the negative side was Lithium Americas, which had an expected gain of 120 per cent but achieved a loss of 76 per cent. If there were only a couple of analysts, the variation could be a random error, but 16 analysts contributed to the embarrassment. The biggest positive error occurred with Celestica, which was expected to decline by four per cent but went up by 275 per cent. Seven analysts contributed to that egregious miss. As I concluded last year, I will continue to ignore analyst target prices when making decisions.

This kind of prognostication miss isn’t the exclusive purview of Canadian analysts. It is a little too early, at time of writing in late November, to do a complete debrief on last year’s predictions. However, barring an incredibly fast correction in December, Wall Street analysts missed the mark by a wide margin for the second year in a row. The average of the big bank projections was for the S&P 500 to gain 1.9 per cent, with a range from negative 12 per cent to positive 13.2 per cent. At the time of writing the S&P 500 was up 25.5 per cent. While I didn’t nail it like in 2023, my prediction was still amongst the best of the U.S. analysts.

In 2023, the Wall Street average prediction was a loss of two per cent, and in 2024 the average was a gain of 1.9 per cent. Any investor that sat out both years because of these pessimistic projections would have sat out gains of 55.9 per cent as of late November. Knowing no one, including myself, can make accurate predictions with regularity, I simply remain fully invested all the time. On a long-term basis, stocks blow the doors off bonds and cash, as long as we can tolerate the fluctuations.

My main prediction every year is that most predictions will be wrong. I nailed that one! In the words of Ray Dalio, founder of Bridgewater Associates, “He who lives by the crystal ball will eat shattered glass.”

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Firstly, I am writing 10 days prior to the U.S election and you’ll be reading it a month afterward, so my initial comments will or will not be validated by the time you read the article. The market prices in expectations prior to their occurrence — and surprises contrary to expectations are what really move individual stocks and the market at large. Examples of expectations pre-priced by the market include politics, interest rates and corporate profitability.

Politics

The market is currently pricing in a Trump victory. He has momentum with his polls having been lowest just after the Trump/Harris debate, and he is in the lead in every swing state, albeit by narrow margins.

The market was very nervous about a Trump win eight years ago, but less so now that he is a known political commodity (whether you like him or not) and his tax cut and regulation reduction promises are good for the economy and the market. Negatively, there is concern tariffs will reignite inflation, and tax cuts will expand the deficit. Both these factors are contributing to a unique situation where, while short-term interest rates are being cut, long-term rates are rising. U.S. 10-year bonds have risen from 3.65 per cent to 4.24 per cent since the Fed announced its first 0.5 per cent rate cut.

If a surprise Harris win occurs, I think we will see a short-lived stock sell-off and bond rally. However, as written many times, the money is made taking a long-term perspective, so I have no plans to attempt outguessing these short-term gyrations.

From a longer-term perspective, markets loosely follow a presidential cycle. The third year of the cycle, 2023, is by far the best year, with an average after inflation gain of 13.5 per cent. The worst year by far is the second year, with an average real gain of just 3.3 per cent. The first and fourth years are average years, but fourth-year gains tend to come after election uncertainty clears. The theory behind these variations is that new administrations implement their tough policy changes early in their mandate, and by the third year are doing their utmost to prime the pump for a robust economy in the upcoming election year.

That said, I don’t see these as tradeable variations. The worst second year in stocks is better than average bond market returns, and averages are made up of extremes. Just because something happens on average, doesn’t mean it will happen this time.

The presidential cycle may partly explain the economic cycle but is a long way from explaining the complete cycle, with the current one being distorted by a very unusual pandemic episode.

Interest rates

The economic cycle moves from boom to bust and back to boom. A robust economy generally leads to higher inflation and increasing interest rates, which act as an economic brake slowing growth and inflation, once again leading to lower interest rates to revive the economy. Governments and the Federal Reserve (Bank of Canada, in our case) try to moderate the boom/bust cycle through spending and short-term interest rate changes. However, the current cycle has seen unrestrained government spending almost everywhere, which is concerning.

Profitability

With those basic explanations, let’s get back to the original question. Naturally, stocks tend to do better in robust economies when sales and profits are growing. I examined historical bull and bear market data. Since 1928 we have experienced 22 bull markets interrupted by 22 bear markets defined as a loss of 20 per cent or more.

The average bear market lasted almost exactly a year, with average losses of 36.6 per cent, and a range from negative 20.6 to 83 per cent. The most recent bear market ended on Oct. 12, 2022.

The average bull market lasted 3.3 years and experienced a gain of 142.2 per cent, with a range of 20.8 to 582.1 per cent. The shortest bull market of 98 days occurred in 1932, and the longest bull market occurred from 1987 until 2000. Coincidentally, the average length of a bull market plus bear market equals a presidential term. The current bull market is just over two years old and has gained 63 per cent, at time of writing. Therefore, the current bull is well short of average bull market gains and duration.

That doesn’t mean it couldn’t end tomorrow, or it couldn’t go on for another five years. Averages are made up of extremes, which the wide range of outcomes illustrate.

It is also important to note that while recessions and bear markets often occur together, that is not always the case. There was a significant recession in 1991 without a bear market, and the 2022 bear market occurred without a recession, even though one was widely predicted.

Renowned investor John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” You will hopefully recall numerous 2021 articles warning about euphoric speculation that was occurring (for example, “Specs and SPACs,” Grainews, March 23, 2021, page 20). That speculative era ushered in the 2022 bear market. While valuations are high, we are not currently experiencing significant speculation as in 2021.

Combining the above thoughts on three key cycles with the current optimistic but not euphoric tone, I think, but certainly don’t know, the bull will continue until its legs grow wearier.

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