Last week I took a phone call from a “wholesaler”. Wholesalers are my main point of contact with mutual fund companies, and they can be great resources. But, make no mistake; the reason that wholesalers call me is because they want me to sell their products. There is no free lunch.
This phone call was no different. The wholesaler offered me some client-friendly material on tax planning, which I gladly accepted. But he also offered to share some information on his fixed income products. I’m not interested in that at all, but lots of people are. Right now, those products are very popular, as people look to avoid the variability of the equity markets.
The wholesaler says something along the lines of having a good option for people looking to avoid uncertain markets, and enquires if that is the type of solution that I am looking for at the moment.
“Not even remotely”, I say. “On the contrary, I think that this is the time to buy equities, not fixed income.” And, perhaps just to shock the guy a little, I add “And, in particular, US equities interest me greatly.”
The USA, of course, is currently subject to all kinds of fear-mongering about its imminent demise. So basically what I have just told him is that I am rejecting his most-popular option, and would rather look at his most-unloved option. You see, when it comes to investments, there are investments that are easy to sell, and then there are investments that people should be buying, and usually the groups are mutually exclusive.
I tell the wholesaler that I am a contrarian. Unlike most people, I don’t want to buy what has already done well. I want to buy what will do well next.
“Ah”, he says. “The US. Lots of beaten up companies down there.”
“Nope”, I say. “Lots of wonderful companies trading at beaten-up prices.” Which is not at all the same thing as buying beaten-up companies.
And that’s a true story. US corporations are a who’s-who of business success stories. And they are more profitable than ever. And they are sitting on mountains of cash. And nobody wants them. Which means I can buy these wonderful companies at incredibly attractive prices.
Meanwhile, there is the popular fixed income option. Think about the name for a moment. Fixed income. Do you really want to live on a fixed income? In a rising-cost world? Probably not. Yet fixed income products are all the rage. That makes no sense, but there you are.
Then you have companies like Apple. Apple just made 17.5 billion dollars. In the last quarter. And these are the types of businesses that people are avoiding? That also makes no sense, but there you are.
Folks, let me tell you about something called “reversion to the mean”. Basically what it means is that if the short-term results have drifted away from the long-term averages, sooner or later you are going to see things get back in synch. In other words, investments that are currently in vogue, such as fixed income, do not outperform forever. And quality investments that are currently lagging, such as US equities, do not underperform forever.
Here’s an example about long-term averages. Prior to the 2008 financial meltdown, the long-term average for the Toronto Stock Exchange was 10.5 percent. After 2008, a year in which the TSX declined by about 40 percent, the long-term average was 10.1 percent. In other words, even though there was a big one year swing, the long-term average return barely budged. Returns might be unpredictable in the short-term, but they are remarkably stable in the long run.
So if you have an asset class that has an extended period of performance below its long-term averages, it most probably means that you are going to see an extended period of outperformance to get back to the long-term performance number.
And what has the last decade been if not an extended period of underperformance for the equity markets?
Reversion to the mean. As Gretzky said when asked what makes him great – don’t skate to where the puck is. Skate to where it’s going to be.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund.
Brad Brain can be reached at
firstname.lastname@example.org or www.bradbrainfinancial.com.