Opinions
Frank Mersch A Comment -- General Comments From an Expert A Commentary N/A Jun 15, 2018
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The Benefits of Long Term Investing: Compounding returns and wealth building
One of the most powerful aspects of long-term investing is the ability to benefit from compounding returns. By holding investments for years or decades and reinvesting dividends or profits, your money grows exponentially over time. Compounding is less effective in day trading because positions are rarely held long enough to accumulate significant returns from reinvested gains. Gains are typically re-deployed into new positions, which, more often than not, are not as good as the position just sold.
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The U.S. market is overcrowded. Going back to 1968 there have been 3 major peaks in the U.S. market of high household ownership of stocks. 1968 saw 28% household ownership, 2000 saw 25%. In both cases they were followed by a 50% drop. Now the household ownership is 30% compounded with foreign ownership of U.S. stocks being more than the previous two times, although this year there has been somewhat of an exodus to other markets. When the S&P 500 reaches this level the following historical return is close to 0%. However U.S. tech stocks have a greater portion of the market now so this pattern may not repeat. This all means investors should be more vigilant and make sure the fundamentals justify what they own.
Stocks and bonds move in tandem. However, the TLT bond ETF has been falling as the S&P has been rising. Over time, this divergence will change, the gap will shrink in the future. For years, the S&P and bonds were in fact moving in tandem, but around 2024 they separated (S&P up, TLT down). It's a healthy market for the two to move in synch.
We have the classic situation with the market climbing a wall of worry, and there's no shortage of things to worry about. Middle East rocket fire, suspension (but not cancellation) of tariffs, US budget bill. Nevertheless, the market trudges higher, buoyed with some support from corporate earnings but mostly by improving sentiment (waning fear and panic from April).
Over time markets make higher highs, punctuated by short and sharp drawdowns that test the mettle of investors.
There was a lot of frenetic trading activity late Q1 and early Q2. That's been to the benefit of some businesses such as owners of stock exchanges, investment banks, brokerages. You're right though, it does wear out investors, especially when they keep getting head fakes and kneejerk reactions that are frequently misinformation.
Investors would do well do learn the lesson of focusing on the fundamentals and owning good businesses. Don't bury your head in the sand on geopolitics, but don't be ruled by them. Shifting sands shift often. Easier to build robust portfolios that can weather macro headwinds.
Right. What really took out some of the fear premium on hostilities was that, going into last weekend, the price of oil already had $10-15 of geopolitical risk baked in. But then the US waded in and dropped bombs, and the results of that are conflicting.
Latest relief rally in equity markets, especially in the US, is prompted by the very tepid, feeble, symbolic response by Iran to those strikes. Seems to have taken the worst-case scenario (strikes on oil infrastructure or closing of the Strait of Hormuz) off the table. Those events would have been very negative for the global economy and risk assets.
His firm owns 3 in their dividend-growers mandate. Canadian banks are a cornerstone of a growth and income portfolio. Secular outperformers of the TSX. Dividends typically grow 6-8% a year on an average 3-3.5% dividend yield. Over a cycle, this gives you good line of sight to low-double-digit total shareholder return; the oligopoly of the 6 makes this sustainable. Stable, well managed, well governed, diversified.
Will pull all sorts of levers to overcome economic headwinds. He expects high single-digit earnings growth this year, notwithstanding the housing market.
The Benefits of Long Term Investing: Lower costs and taxes
Long-term investors make fewer transactions, which means lower brokerage fees, bid/ask slippage and commissions. For U.S. investors, long term gains are taxed more favourably than short-term gains (not an issue for Canadian investors). Frequent buying and selling in day trading can result in substantial costs that erode profits. But it is the taxes that hurt the most. If you have a successful day trade, that’s great. But if you are in a 50 per cent tax bracket, because of capital gains taxes, you now have about 25 per ent less capital deployed in the market than a long-term investor. This reduced level of capital is a giant disadvantage to traders. Long term investors simply compound their capital and pay no taxes (other than on dividends) until their position is sold.
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Market. In the case of 5G he wants to position himself in the companies that have the most spectrum. There is a spectrum auction coming up shortly. The incumbents will probably share 53% and the rest goes to smaller companies. Cellular is going to change all kinds of occupations in years to come. AI is more applicable to more industries than block chain. In the future you probably won't need a radiologist. The insurance companies will love this as they won't have to employ all these people. He is involved in an AI start up fund.