Be Fearful When Others are Greedy, Be Greedy When Others are Fearful

This Too Shall Pass 

The NASDAQ market has declined rather dramatically from its high near 20,000 points just earlier this year to under 16,000 points as we speak. Similar declines are evident in all the world markets as the United States prefers to tax “the world” to solve its own debt crisis. Interest rates have crept higher over the last 5 years, and this has made interest payments a greater and greater part of the budget payment. In 2011 the US saw their debt downgraded, which could happen again. They “kicked the can down the road” by passing a bill in 2011 that raised the ceiling, but this is not what they want to do today. They want smaller government by reining in government spending and making countries that run trade surpluses with the US pay extra. 

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​Selling Might Be Overdone 

While valuations are still high in certain areas of the market, smaller companies may offer some value. Shares of the Magnificent Seven (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) have seen their shares get hammered, but they still trade at excessive earnings yields of between 18 for Google and 137 for Tesla. Historically, a Price/Earnings ratio of 16 was thought excessive. For example, Nvidia shares today only yield roughly 3% in earnings. I can do better in a bond. 

​An opportunity from the contagion from a market selloff happens with investors searching for liquidity—they need cash as they may be getting margin calls (the banks are calling in their loans on investments) or just the malaise caused by the feeling that the future is daunting—the risk of a recession. For example, I held a lot of EL preferred shares back in 2019, as there was little value in the equity market. When the markets got rough, these shares actually went down at first when their value with interest rates declining was massively enhanced. The same thing is happening today. There are also some obvious examples of value where Cenovus preferred shares (the old Husky Energy) have sold off. For example, their B shares traded today at $21.75, which is ludicrous when you consider the likelihood the company will buy the shares back at $25 within 1 year. Plus, you get a quarterly dividend while you wait. Or Melcor REIT shares went today as low as $5.30 when there is a deal on the table to take them under Melcor corporate in a week for $5.50. I’m not giving investment advice on these securities, but in my world of deep discount stocks, the market has definitely thrown out the baby with the bathwater. 

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History Repeating Itself

In 1987 the markets cratered some 20% in 2 days. I had put my order in to buy some AGF HiTech fund on the Friday, but in those days the order was booked when the money got there, so my order went through after Black Monday. Fast forward a bit, and my fund gained some 20% in less than 1 year. While I see value in certain areas of the market today, this is not the great buying opportunity of 2020 or 2009. So, my choice would be for funds that are managed prudently and not aggressively.

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No Place to Hide

The Asian markets have dropped today, with the China index declining some 6% and Hong Kong down 13%. As I write this (Tuesday in Asia), the markets are bouncing back with the Japan market up some 5% and the US futures markets gaining as well. Bonds and cash just do not seem to be the place to be. Cash was a great asset to hold, but now that the horse is out of the barn, it is a good time to invest if you can. Peter Cundill, a historical value investor, would vacillate between holding cash and holding securities. Historically, he was right roughly 50% of the time, and the other 50% he missed out on a gaining stock market. Bonds just don’t do it for me as their yields are much lower than the earnings yield on equities, interest payments are stagnant where stocks can increase their dividends, and inflation and taxation are not favorable to holding them.