Not All Stocks Rise When Markets are Up

Did you know that during any given year when the market is rising, up to 42% of stocks may simultaneously be declining?

Simply being ‘in the market’ during an up year doesn’t guarantee positive performance. Some years are worse than others, but history shows stock-pickers can easily lose money despite being right about market direction.

The chart below demonstrates this phenomenon over the past 20 years. The blue bar shows calendar year performance for all positive years dating back to 2002. The red line shows the % of stocks that were negative during the same year.

Lesson: unless you have the golden touch, it’s best to tap into market gains by building exposure to a broad basket of stocks. The easiest and cheapest way to achieve that is by using a low cost index fund.

Investing Wealth

The Case for Deflation

Inflation is a hot topic right now. Understandably so, as prices for a range of commodities (lumber, copper, etc.) have risen substantially over the past several months.

Chart: Google Search Trends for ‘Inflation’ in the United States

Raw materials price pressures are now showing up in consumer prices with CPI rising 4.2% year over year ending April 2021. This level of CPI has not been seen since the early days of the 2008 global financial crisis.

However, it is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

There are several reasons.

1) Milton Friedman once said that “inflation is always and everywhere a monetary phenomenon”. I’d argue that he is only half right. Central banks can increase the money supply all they want, but to have an inflationary effect the velocity of money must remain stable or rise. Real world experience clearly shows that money velocity is not constant and tends to have an inverse relationship with the level of a country’s indebtedness. And as you all know, we are drowning in debt right now.

It is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

The relationship between indebtedness and money velocity is clear in the following chart. As the level of indebtedness of the US economy started to significantly rise in 2008, money velocity declined. Ultimately, money velocity plummeted to new lows during the Covid-19 crisis and has yet to recover, despite an improving economy.

Effectively, what this means is that new money entering the system (generally to fund new debt) is simply tucked away, mitigating any inflationary effects of monetary expansion.

This phenomenon is also illustrated by the declining marginal economic benefit created by new debt. The economic impact of additional debt today is much lower than it was in decades past. Therefore much more money needs to enter the economic system to have the same impacts it did in the past. Of course, more new money means more debt. By now you’ve probably noticed this is a vicious cycle.

2) The current inflationary pulse was triggered by the partial paralysis of the global supply chain. Exports out of low-cost producing countries grinded to a halt, forcing Western countries to purchase from more expensive domestic suppliers or compete over dwindling supply.

As vaccines are delivered the mechanisms for global trade – offshore manufacturing + shipping – can resume. Imports into the US are already back to pre-pandemic peaks and it’s only a matter of time until renewed competition from cheaper sources pushes prices down.

3) Labour productivity tends to rise coming out of recessions. Higher productivity offsets higher wages, thus putting a cap on unit labour costs that can flow into prices. I believe this phenomenon will be even stronger as we exit the pandemic.

The nearly immediate and widespread adoption of new software and methods of working have compressed a decade’s worth of productivity gains into the present. Not only that, but companies that maintain a remote workforce can benefit from labour cost arbitrage across geographic regions. Over the long run, both of these advances will keep a lid on unit labour costs. This is disinflationary.

4) Population growth in the US continues to be very weak and will be for the foreseeable future. 20-something year olds simply can’t afford to have kids. Or they are choosing not to bring new people into the world for ethical reasons.

The point is that forward demand driven by new consumers entering their prime spending years continues to decline. When demand declines prices fall.

While nobody can predict the future, one can use data and hard evidence to create a guide. Evidence suggests that those calling for a shift in the economic regime – from disinflationary to inflationary – could be wrong. I believe, as a diversified investor, it is important to prepare for the possibility that the pundits are wrong.

While I won’t know if I’m right or wrong until some point in the future, it appears that the bond market might agree with my thesis, as the yield on the 10yr has flatlined since March 2021.


Dennis Gartman’s 22 Rules of Trading

Note: These ‘rules’ are for the active trader. Not for the normal person looking to build a retirement nest egg while working a full time job. For most of us – including the financially well-educated – the best strategy is to buy and hold low cost index ETFs.

1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly,” reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen… just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the “winning” new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when… and how infrequently this rule may be invoked!


The Sad Truth: Plastics “Recycling”

(Originally distributed in “The Responsible Investor” eNewsletter)

“There is plastic in your food, plastic in your sea salt, and there is plastic coming out of your tap.”

The Problem: Plastics

Last Week Tonight with John Oliver (click image to watch on YouTube) exposes the plastics recycling farce.

The solution?

Loop and Terracycle CEO Tom Szaky speaks on his work with major consumer brands to reduce waste to nearly zero (followed by interviews on other ESG issues).


MSCI Webcast: Foundations of Climate Investing

MSCI Webcast: Foundations of Climate Investing


How has climate risk been priced into equity markets?

How can we model climate risk in preparation for net-zero targets?

What are the Climate Paris Aligned Indexes and how can they help investors seeking a net-zero strategy? (MSCI)

EU urged to end ‘doom loop’ with tougher climate finance rules

European Union policymakers faced a call on Wednesday to break a ‘climate-finance doom loop’ by making banks hold up to three times more capital to cover risks from fossil fuel activities.

Finance Watch, which campaigns to make finance work better for society, has written to European Commission President Ursula von der Leyen, urging the EU to toughen capital rules for banks and insurers involved in environmentally damaging activities.

“The longer the European Union waits, the higher the chances mount that it will face a financial crisis induced by the climate crisis,” Finance Watch said in the letter. (Reuters)

Future shock. Absent decarbonization shock treatment, humans will be wedded to petroleum and other fossil fuels for longer than they would like.

Future shock. Absent decarbonization shock treatment, humans will be wedded to petroleum and other fossil fuels for longer than they would like. Wind and solar power reach new heights every year but still represent just 5% of global primary energy consumption. In this year’s energy paper, we review why decarbonization is taking so long: transmission obstacles, industrial energy use, the gargantuan mineral and pipeline demands of sequestration, and the slow motion EV revolution. Other topics include our oil & gas views, Biden’s energy agenda, China, the Texas power outage and client questions on electrified shipping, sustainable aviation fuels, low energy nuclear power, hydrogen and carbon accounting. (JP Morgan)

Download Paper

Listen to Podcast

Income Investing Investing

Stock Market Performance During the Great Depression

Many people point to the US stock market performance after the 1929 crash as evidence that stocks can go nowhere for decades.

The argument usually points to the chart below, which shows the Dow Jones Industrial Average failing to retake its August 1929 peak until November 1954. In other words, people make the argument that someone investing in US stocks at the 1929 peak would have had to wait until November 1954 just to break even.

This is false.

The above chart shows the commonly used Dow Jones Industrial Average – an index based on price-returns.

What people completely miss is that investors would have received dividend payments during this entire period. Below, I adjust market returns to include dividends.

According to the calculation below, when including reinvested dividends, an investment at the 1929 peak would have returned on average 5.58% per year ending November 1954. That’s equivalent to a cumulative total return of just under 300%.

While it’s true that the buy-and-hold investor would have ridden a financial rollercoaster along the way, even the worst market timer would have done OK if they simply invested a lump sum and did nothing.

Source: DQYDJ

Of course, it took time for dividends to compensate for price declines. It wasn’t until 1945 that investors started to experience a positive total return. That’s still a long time to wait – and still implicit evidence that stock markets can take a long time to recover.

However, the stagnation narrative is significantly undermined, as this shows it took far less than a quarter-century for the worst market timer to break even.

The above examples show a worst case scenario – someone who’s only decision was to invest at the peak of a stock market bubble and then sit on their hands. This isn’t a realistic scenario for most of us.

Most people invest periodically (i.e. not all at once) as they stash away savings over time. So the more realistic illustration would show how someone performed if they started investing in 1929 and added to their investment over time.

The following chart shows the portfolio value for someone who spread their investment over a 40 month period, starting at the end of 1929. In this example, the person invests a total of $20,000. As you can see, their account is positive (i.e. above $20,000) from the end of 1933 onward.

This more realistic scenario again shows the myth of secular stock market stagnation narrative is largely misleading.

Data from Robert Shiller
ETFs and Funds Investing

Should Canadian Investors Hedge US Dollar Exposure?

After constructing a well-diversified portfolio of Canadian and US companies – using a combination of individual stocks and ETFs – you look at your portfolio’s currency exposure and wonder: “Should I hedge or not?”

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I believe there are reasons for and against hedging US dollar exposure, many of which investors fail to consider.

Most investors incorrectly base their decision to hedge US dollar exposure on their view of the US dollar. While it makes intuitive sense that if one is bullish on the US dollar they’d want unhedged exposure, I believe this is the wrong way to execute on this view.

Some Canadian investors might have 30, 40%+ of their equity holdings allocated to a diverse basket of US companies. They’ve committed a lot of time to ensure individual exposures aren’t excessive and spread across a range of sectors to reduce the risk of one individual weak holding making a significant impact on portfolio performance.

Yet, after all that careful effort they leave their entire US equity position exposed to a single factor: the US dollar. While there may be some nuances (e.g. some US companies will benefit from a weak US dollar), a decline in the US dollar would negatively affect the entire 30, 40%+ US equity position. This is a massive overexposure to a single risk factor.

By leaving a large portion of a portfolio exposed to a single factor investors are taking on significant risk. Many people fail to recognize this.

Historical Canadian dollar performance

If you were to ask Canadian investors during the mid 2000s about US stocks, most would say they stay far away. Why? Because during that time the Canadian dollar appreciated significantly against the US dollar, wiping out investment returns. At that time, currency risk was at the forefront of their minds because they had just experienced its painful effects. Between 2002 and 2007 (a 5 year period!) the Canadian dollar appreciated roughly 60% against the US dollar.

Note: Many investment practitioners argue that CAD/USD is a wash over the long run. The chart below shows that today’s level is close to where it was almost 30 years ago. What this argument fails to appreciate is that not all investors have a 30 year time horizon. An investor with a 5 year time horizon (note that many investors behave like they have 1 year time horizons) would have either experienced a massive tailwind or a massive headwind due to USD exposure. Not a gamble people should take as they approach real-world liabilities, like retirement. Also, the argument that CAD/USD is a wash over the long run erroneously assumes that exchange rates are mean-reverting and deviations are temporary. This is false.

Nobody knows where the USD/CAD exchange rate will head over the long run. Smart people have great guesses, but nobody truly knows. And it’s quite possible that CAD appreciates considerably again, for one reason or another. My point is the risk still exists and it always will.

By leaving a large portion of a portfolio exposed to a single factor investors are taking on significant risk. Many people fail to recognize this.

As with everything in finance and investing, there are multiple considerations. Nothing is black and white, and currency exposure is one of those things.

USD performance during crises

While overexposure to a single risk factor should be avoided in all portfolios, some exposure to the US dollar – due to its safe-haven status – does provide a portfolio cushion in times of crisis.

The chart below shows the level of CAD/USD during the recent crash. From December 2019 to March 2020, the Canadian dollar depreciated roughly 10% against the US dollar. This means that Canadians holding unhedged US assets would have benefited from a buffer.

Below, I’ve shown the performance of two TSX-listed US equity ETFs during that time period. Both are Vanguard S&P 500 Index ETFs, but VSP is currency hedged while VFV is not. You can see how the unhedged version of the ETF declined about 10% less than the hedged version, due to US dollar exposure. A similar narrative played out during the 2008 financial crisis.

So should I hedge or not?

Personally, when given the simple option I hedge. But overall, I might only be about 50% hedged.

My US exposure is attained using a combination of ETFs and individual stocks. Because it is much more time consuming to create my own hedges (e.g. using FX derivatives) my individual US stock holdings are unhedged. However, most TSX-listed US ETFs offer hedged and unhedged versions. In those cases, I buy the hedged ETF.

ETFs and Funds Investing

Does ESG Investing Actually Achieve Anything?

Typical ESG investing (aka socially responsible investing, SRI investing, responsible investing, etc.) is a waste of time. It doesn’t achieve what many hope and believe.

ESG investment funds may be counterproductive and actually worsen the issues they are meant to fight.

Instead, many ESG funds only serve to pacify anxious investors who wish to decorate their portfolios with feel-good products. It’s sad to say because both ESG investment product manufacturers and investors usually have the best intentions. They want to do the right thing. Unfortunately, many fail to recognize their efforts are probably counterproductive and likely worsen the issues they are meant to fight.

As global interest in ESG investing rapidly grows, it is critical that investors understand how many ESG investment funds fall short of their implied objectives. trends.embed.renderExploreWidget(“TIMESERIES”, {“comparisonItem”:[{“keyword”:”esg”,”geo”:””,”time”:”2004-01-01 2021-04-02″}],”category”:0,”property”:””}, {“exploreQuery”:”date=all&q=esg”,”guestPath”:””});

What is an ESG fund?

ESG funds are investment products (like mutual funds or exchange traded funds) that are constructed to feature environmental, social and corporates governance factors into their investment process.

Many ESG investment funds attempt to do this by excluding certain categories of sin stocks: guns, tobacco, porn, and so on. With growing concern about climate change, oil is increasingly at the top of the sin list.

The first problem with oil company exclusion is it’s very limited in scope. Oil companies don’t operate in a vacuum and are highly integrated within all sectors of the economy. They are financed by banks. They supply petroleum to chemicals and plastics manufacturers. Plastics are used in the production of millions of products. If boycotting oil companies, why not also their best customers and financiers?

It’s true that oil companies are at the heart of CO2 emissions and shutting down oil companies would stop the flow of petroleum based products throughout the economy. But excluding oil companies from ESG portfolios fails to shut anything down.

Companies have always had to work with various strata of investors who exclude certain investments based on a variety of characteristics. Value investors shun momentum stocks. Most of the world doesn’t invest in Canadian companies. Tobacco and gun stocks have been excluded from many large portfolios for decades. Yet, tobacco stocks, gun stocks and Canadian stocks have continued to perform as expected. Altria (formerly Phillip Morris) has a stellar long-run track record.

Is ESG investing profitable?

The exclusion of companies or sectors doesn’t affect performance. Research from South Africa’s period of Apartheid has shown that boycotting certain companies, sectors or countries is ineffective at altering share price performance.

Companies simply don’t need 100% of investors to be interested in their stock. There will always be a class of investors who don’t care about what they invest in as long as the returns are good.

In fact, the exclusion of certain companies from ESG portfolios may actually improve return prospects for those excluded companies. Perversely, if 80% of investors shunned Altria, for example, causing its share price to decline Altria’s expected future return would rise, attracting the remaining 20% of investors. A smaller pool of potential investors doesn’t change a company’s business prospects, and thus its intrinsic value. There will always be investors willing to capitalize on this. Moreover, without the burden of ESG-related business expenses, Altria’s intrinsic value may actually rise relative to other ESG-friendly companies.

Does ESG investing make a difference?

As conscientious investors abandon a company, the remaining class of financiers care less-and-less about the company’s practices. All things equal, this leaves the offending company to continue as it pleases, perhaps even creating a disadvantage for the ‘good’ companies that must operate under greater constraints.

Investors looking to force change would do better by adopting methods used by activist investors, like Carl Icahn. Activist investors take large stakes in companies they want to change. Shareholders, as company owners, have a right to board representation. The board hires company executives who then run the company.

To create change, investors must not distance themselves from companies with weak ESG practices. Instead, they must directly engage the companies they wish to change.

Research by the European Corporate Governance Institute shows that shareholder activism can create real change:

We study the nature of and outcomes from coordinated engagements by a prominent international network of long-term shareholders cooperating to influence firms on environmental and social issues. A two-tier engagement strategy, combining lead investors with supporting investors, is effective in successfully achieving the stated engagement goals and is followed by improved target performance. An investor is more likely to lead the collaborative dialogue when the investor’s stake in and exposure to the target firm are higher, and when the target is domestic. Success rates are elevated when lead investors are domestic, and when the investor coalition is capable and influential.

Abstract, “Coordinated Engagements”. January 2021

Given this perspective, ESG scores for investment funds (provided by various rating agencies) can be totally misleading. Based on current methodologies at many ratings agencies, to get a high score a fund must have minimal exposure to offending companies. As shown above, this can have a counterproductive result.

Don’t divest. Engage.

None of this is easy. However, if institutional investors (which represent individual investors) combine efforts and own enough of a company to engage the board they can enact real change. This is not an unusual practice, as investors have banded together many times in the past.

As public concern over climate change grows, there will likely be enough energy to make a real difference. However, it is critical that efforts are directed correctly, away from feel-good ESG products and into activist ESG funds.


Peter Lynch: 75 Years of WISDOM in One Speech

If you can’t explain to a 10 year old why you own a stock, you shouldn’t own it.

You can’t forecast the future.

And more common sense investing gems.


Data Visualization: Railroad Stocks

Another set of data visualizations provided by This time data visualizations feature railroad stocks such as CN Rail, CP Rail, Union Pacific, Norfolk Southern, CSX Corp, Wabtec Corp and Kansas City Southern.