Family Finance returns, stock market echo burns and the CRA’s latest spurn

Good morning. One of Warren Buffett’s many rules is that everyone should find a very smart, high-grade partner — preferably slightly older than you — and then listen very carefully to what that person says. With that in mind, the Oracle of Omaha followed his own advice in his most recent Berkshire Hathaway Inc. shareholder letter by writing up some of his longtime partner Charlie Munger’s recent thoughts. At 99, the vice-chair of Berkshire Hathaway is seven years older than Buffett and a few decades older than I am, but his words are worth heeding no matter your age, especially since it’s sometimes hard to keep an eye on the long game in volatile market times. Here are a few of his nuggets.

“The world is full of foolish gamblers, and they will not do as well as the patient investor.”

The increasing prevalence of investors gambling is something portfolio manager Martin Pelletier also pointed out last week. There are more retail investors than ever in the stock market, and some of them are actually gamblers who became hooked after sports betting shut down during COVID-19. Everyone likes a quick buck, so they’ll often bet on a hot meme stock or cryptocurrency scheme without doing any research, but that usually hurts in the long run. Investing should not be akin to gambling.

“A great company keeps working after you are not; a mediocre company won’t do that.”

A bit macabre, perhaps, but a company that will continue to exist and be profitable after you die is probably a good one to consider investing in while you’re alive. One clue of future longevity is a company that offers a dividend. Starting a dividend program or raising the payout are not decisions taken lightly in the boardroom. After all, a future dividend cut, such as the one Intel Corp. recently did, hurts investors’ confidence even if the company does so in order to retool for the future. Aside from the extra income dividends bring in, dividend-paying stocks also outperform non-dividend-paying stocks during recessions and in the long run, says investment adviser Taylor Burns. Share buybacks can also be a sign of confidence and are good for investors, Buffett says.

“Ben Graham said, ‘Day to day, the stock market is a voting machine; in the long term, it’s a weighing machine.’”

OK, that’s a bit of a cheat since Munger is merely repeating what the father of value investing once said, but constantly watching the stock market can lead to panicky decisions to buy or sell based on someone else’s whim. For example, investors sell en masse if the United States Federal Reserve says it’s raising rates, then buy en masse the next day when someone — seemingly anyone — casts doubt on the Fed’s assertion. U.S. stock prices have risen this year even though the Fed is staying the course and despite corporate earnings and estimates that are declining to the point where economist David Rosenberg says an earnings recession is underway.

Investors often double down on a losing proposition because it was one that worked before. Generally, investors just aren’t that good at learning from their past mistakes, says Hall of Fame investor Tom Bradley. This dynamic is in play right now with the influx of money into high-growth tech stocks, a strategy that worked incredibly well for a decade until the beginning of 2022 when interest rates started increasing and debt-fuelled corporate strategies lost their lustre. Rates are still high and a lot of the high-growth tech stocks still don’t have a clear path to profitability, yet investors are flooding back in. “We should never forget that markets are totally unpredictable,” Bradley says.

“You have to keep learning if you want to become a great investor. When the world changes, you must change.”

Investing veteran Peter Hodson likes to tell the story of an analyst who once advised his clients to buy Blockbuster LLC and sell Netflix Inc. even though consumers were clearly starting to shun physical media in favour of streaming. The analyst proceeded to reiterate that call 11 more times as the video-store chain plummeted into bankruptcy while the streamer’s shares soared to about US$680 in 2021. Netflix shares have since come back to earth, though it still has a high P/E of 35 and trades for about US$320. Blockbuster? There’s still one location in Bend, Ore.

“Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”

The more things change, the more the keys to successful investing stay the same, which is something Bradley pointed out in a column almost a year ago that championed patience, discipline and the power of compounding — three things that apply just as much today. “Time in the market is more important than timing the market,” he says, as is diversification unless, he adds, your name is Warren Buffett.

Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected]

Circumstances may cause investors some delays, but never lose sight of your goal

Gearheads know about turbo lag (those split seconds between pushing down on the accelerator and actually accelerating), but Financial Post columnist Tom Bradley points out it also applies to the investing world. Even though stocks jump and dive on various announcements, those moves don’t really show up on a stock chart in the long run, and that’s something investors should be really paying attention to.

BABY, YOU CAN DRIVE MY CAR

4 monks remind investors about some of their bad habits

Four monks walk into a bar … wait, that’s something else. Here, portfolio manager Martin Pelletier relates a classic Zen story about a group of monks who break their silent meditation for a variety of reasons that might just resonate with different types of investors today.

BAD HABITS

Citi strategists say traders are piling up short bets on stocks

Investor sentiment toward stocks is becoming more pessimistic as they build short bets in both United States and European equity futures, according to Citigroup Inc. strategists. But overall positioning remains “moderately” positive, suggesting there is potential for the bets on a downturn in markets to increase.

CAUGHT BY THE SHORT HAIRS

More bearish thoughts: S&P 500 index is 2.5 times too expensive: JPMorgan

Energy investors have had a good couple of years, but Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners LP, reminds the Financial Post’s Larysa Harapyn that things weren’t so great before then. “Energy investors have very clearly said it’s now our turn to get paid, it’s our time to get rich and we’re going to get rich through meaningful buybacks and meaningful dividends,” he says. And because Canadian oil companies have good balance sheets and are sitting on 20 or 30 years’ worth of inventory, so they don’t have to spend on mergers and acquisitions, he says things look good for investors in the future.

WATCH THE VIDEO

FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.

The Fed should have followed the Bank of Canada, but here’s what investors can do

The United States Federal Reserve has not followed the Bank of Canada in pausing its interest rate hikes. Indeed, three more hikes by the Fed are now priced in. Economist David Rosenberg modelled the financial conditions the Fed seems to want to see before it pivots, and the results are ugly: about 3,100 on the S&P 500 and around 800 basis points on high-yield spreads. Here’s what investors can do in the meantime.

FED UP WITH THE FED

The markets are alive with the sound of echo bubbles

The recent surge in tech stocks has many investors believing the boom of the past decade is back after a 14-month-long break. But Financial Times columnist Ruchir Sharma says the opposite case is more likely since the 10 biggest bubbles — from the Roaring ’20s to the dotcom boom — have all had echo bubbles that, unfortunately, gradually fade away, leaving investors with egg on their faces. 

TINY BUBBLES DON’T MAKE ME FEEL FINE

Many investors have enjoyed the bigger dividends and share buybacks that the oilpatch has been handing out lately, but some have questioned whether some of that money should go into exploration and development to set companies up for the future. Those people will be happy to hear that investment in oil and gas production in Canada will jump by 11 per cent to hit $40 billion in 2023, three years after hitting a low of $22 billion in 2020, according to the Canadian Association of Petroleum Producers. “It’s a pretty strong signal that the Canadian upstream oil and gas industry has started the year in a position of strength,” says chief executive Lisa Baiton.

Should I include a pension as part of my fixed-income holdings when determining my asset mix?

Asset allocation is not an exact science. If it was, every investor would be assigned the same portfolio allocation no matter which investment firm or questionnaire they used. Certified financial planner Allan Norman says it’s fair to include things such as pensions, home equity, mortgage paydowns, business sales, inheritances, etc., as part of your allocation strategy, but there’s more to it than that — a lot more.

GET THE ANSWER

If you have an investing or personal finance question, hit us up at [email protected].

The CRA generally lets you claim family medical expenses — not this time

The Canada Revenue Agency allows taxpayers to claim the medical expense tax credit (METC) for both themselves and dependant relatives, but this isn’t codified in law so these expenses can be denied as one man found out to his chagrin. Tax expert Jamie Golombek has the details on why the CRA denied the taxpayer’s claim and what the judge decided when the matter landed in Tax Court.

NO HEALING HERE

This couple wants to retire early, but are their government pensions enough?

Investing in real estate is playing a big role in how a married couple in Ottawa are planning to fund their early retirement, so much so that they’re focused on paying down payments rather than contributing to registered investment accounts that could add to their government pensions. We asked financial planner Ed Rempel and investment adviser Allan Small to help them come up with a better plan.

FAMILY FINANCE

Need help to solve your money issues? Drop us a line at [email protected] with the general gist of your problem and we’ll try to find some experts to help you out.

These are the adviser fees, hidden and otherwise, that investors need to be wary of

Most Canadians are largely in the dark about how much they pay for investment services despite years of regulatory efforts to increase fee disclosures. For those who aren’t sure how much they pay for financial advice — and for those who think they do — certified financial planner Jason Heath breaks down how all those fees work.

THE FIDDLESOME NATURE OF FEES

Good news if you’re a Li-Cycle Holdings Corp. shareholder: The Toronto-based company’s stock rose as much as 10 per cent on the NYSE after the recycler of minerals needed to power electric vehicles inked a conditional US$375-million loan from the United States Department of Energy to help build a plant in Rochester, N.Y.

Bad news if you’re on the Canaccord Genuity Group Inc. buyout team: The financial firm was valued by RBC Capital Markets at $12.75 to $15.75 a share, or as much as 40 per cent more than the $11.25 offer the management group trying to buy it has offered. That group disputes the valuation, but the firm’s shares are currently around $11.50, which suggests some investors expect a sweeter offer.

Good news if you like commercial real estate: Tougher financing conditions and a potential economic slowdown will weigh on investment in that sector, according to CBRE Group Inc.’s Canada Real Estate Market Outlook. But large investors are targeting real estate over the longer term and that interest means commercial real estate investment could reach an all-time high of $59.3 billion this year.

Bad news if you like Canadian banks: It wasn’t a great week for the big banks, especially the Bank of Nova Scotia, whose stock dipped 5.5 per cent on Tuesday after its first-quarter profit missed analyst expectations by about nine per cent. Toronto-Dominion Bank, meanwhile, agreed to pay US$1.2 billion to settle claims it was facing in connection to the Allen Stanford Ponzi scheme case.

Good news if you live in Quebec: The province is home to nine of the top 15 most affordable places for first-time homebuyers based on a 20-per-cent down payment on the city’s benchmark home price, closing costs and annual recurring costs, according to real estate listing website Point2. The cheapest three are Saguenay, ($74,342), Trois-Rivières ($79,517) and Québec City ($84,370).

Bad news if you’re a Freedom 55 fan: The new golden age of retirement in Canada is 61, according to a Canadian Imperial Bank of Commerce poll, but more than half the non-retirees surveyed doubt they will be able to achieve that goal. One reason could be that 57 per cent are shifting their focus from planning for the future to meeting their current needs.

Good news if you’re planning to sell a home in Calgary: Inventory levels in February (of 2,750 units) are among the lowest since 2006, and that’s supporting some stronger-than-expected monthly price gains, according to the Calgary Real Estate Board. “Prices are still below the May 2022 peak and it is still early in the year,” says chief economist Ann-Marie Lurie. “However, if we do not see a shift in supply, we could see further upward pressure on prices over the near term.”

Bad news if you’re a First Horizons Corp. shareholder: Toronto-Dominion Bank’s US$13.4-billion acquisition of the Memphis, Tenn.-based bank may be delayed even more than projected last month because of regulatory hurdles. First Horizon shares slid as much as 16.1 per cent to US$20.78 on Wednesday after the delay was announced. The acquisition values First Horizon at US$25 per share.

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