Wow! Once again, an overwhelming response to the Ask me Anything blog. Huge number of questions. A few of which I had to answer in the original blog post given that I wasn’t able to answer the specific question with much to offer. So if you don’t see your question answered in the next couple of blogs, check last weeks “Ask me” blog.
Like I did with my last “Ask me” answers, I’ll be spitting the responses over 3 blogs this week. So lets get started!
Fundamental Data & relationship between CDN and US sectors
Ana asks about fundamental data sources for retail investors, specifically free sources. As a technical guy, I don’t delve into this arena, so I asked Craig Aucoin, who is the fundamental analyst side to the ValueTrend mix to reply to that question. Here’s what he said:
I am not aware of a free site that has reliable concise data. Often it seems that the raw data that many sources provide are not adjusted in any way. Revenue numbers are usually the most easily comparable and reliable between multiple sources. Even then the comparability between different time periods may need to be adjusted. Adjustments are really required in most situations in order to make fair comparisons. A fairly robust free place to start I think is actually Google Finance.
Ana also asked about the relationship between Canadian and US stock sectors. Do they coincide?
The answer is that yes, more often than not they do coincide. Oil is oil, for example.
However….Sometimes the TSX doesn’t offer fair representation of the same sector (our equivalent sector is small – like consumer staples or technology), or doesn’t have the same rules applying to a sector. For example, the US banking system operates within more of a free market system. Regional banks can be started by independent entrepreneurs. Our banking system is closed to competition. You might say its a cornered market. The credit unions are not publicly traded, so they are not something we can compare, Thus, with the banking sectors you are really looking at a very different business model here in Canada vs. the USA.
The utilities sector, below, illustrates how some sectors that are normally cross-border related in performance can suddenly disconnect. The black line is the US utilities ETF (XLU) and the red line is the Canadian version (ZUT). Note the recent disconnect as the Canadian sector is moving higher while the US side struggles. The bottom pane of this chart shows a comparative between the two sides. Note how the XLU has underperformed ZUT since early 2019. That underperformance accelerated this year.
Hedging strategies vs cash vs. buy n’ hold
Rick asked about hedging strategies – what are the upside/downside risks to a portfolio when using hedging securities like options, inverse ETF’s, etc?
Mary asks if we ever go 100% cash, especially in current market conditions. She asks me if I think we are in a bubble.
To start, we never go 100% cash. To do so is to make a flat assertion that you are 100% confident in your bearish prognosis. I am never 100% certain about the market. If you read my blog regularly, you will note that I use a risk/reward compilation known as the Bear-o-meter. We use this indicator to guide us in our risk stance. If the reading is for higher risk, we tend to hold up to (but no more than) 50% cash. We will reduce our beta (market correlation) of our securities. We might even create “artificial cash” via some of the hedging strategies noted in the blogs linked to answer Ricks question.
Do I think we are in a bubble? Well, yes and no. I have made it crystal clear over this summer (hit the blog button and read the last 3 months of entries) that this market is amongst the most concentrated in history. Its been a dozens stocks doing all the work. So yes, those stocks (Tesla, Apple, etc) went into bubble territory. I called Tesla out recently.
But I maintain that the value stocks, and commodity stocks, are UNDER VALUED. Not overvalued like the dirty dozen, they are cheap– not even fairly valued! What we have before us is the land of opportunity to make money. Index players have begun to underperform this month as the dirty dozen sell off. Meanwhile, the value stocks are seeing moneyflow. Its not a stock market. Its a market of stocks!
Finally, Lance asks about the value of timing the market. He read a study that showed if you missed the best days on the market you lose out.
Lance, I have covered this in the past via my writings for Investors Digest and other publications. But I haven’t done the study myself for about a decade. Basically, the flaw with the “miss the best days” argument assumes that you had the unbelievably bad luck or bad analysis that you managed to pull out for only the best days. Really? You’d have to be clairvoyant (in a bad way) to do that as poorly as those studies show! Further, they don’t bother showing the fair comparison to the effects of missing the worst days. I’m not saying anyone can do this. But I am asking for a fair comparison. And it turns out that my original studies from over a decade ago hold true. That is, even if you missed the best days AND the worst days you’d be ahead of the market. Here is a link to just one study out there on this subject. The effects of missing the bad days outweigh the risk of missing the good days. If you can do it.
Bottom line: I agree its hard to time the market. I use my risk/reward parameters to dampen volatility more than time the markets for outperformance. To many investors, the massive 20-50% downdrafts on the markets are hard to handle. Especially if you are invested in equities during a crash and need to pull money out for a RRIF payment or an emergency. True, though, if you can take the 50% selloffs that took 2-3 years to recover from like 1999 or 2008, or if you can live through the sideways markets that took up to 17 years of no returns like 1966- 1982 – then index buy n’ hold is fine. The 100 year chart of the DJIA paints a clear picture of these prolonged periods. I don’t think its a mater of what can and can’t be done. I think its more a matter of an investors ability to be patient, and if they have enough time to actually live through the prolonged sideways or bear markets. If you can do so, you will profit over the longer term with a buy n’ hold strategy.
What I look for in a chart
Marla asks what indicators and strategies I use when searching for a good stock chart. Well, I have a comprehensive writeup on that very subject on the ValueTrend website. Here is the link. I also did a webinar with my intern (who isn’t with us any more) on Technical Analysis basics. The link for that presentation is here.
That’s it for today. I will be back with more “Answers” over two more blogs this week. I’ll do another “Ask me” blog in about a month, so don’t worry if you missed the deadline for this one.