A Comment -- General Comments From an Expert (A Commentary)

Losing money in the stock market: Underestimating how much it costs to be public

Many investors seem enthralled by tiny micro-cap companies, those with market capitalization of $10M or less. We guess these investors are looking for “lottery tickets.” Yes, we know one way to get rich is to buy a million shares of a 10-cent stock and watch it go to $5. But seriously, how often does this happen? Answer: not very. Speculative investors seem to forget how expensive it is to be a public company. Suppose you are looking at an $8 million market cap company. Being public, with listing fees, regulatory fees, accounting fees, lawyer fees, shareholder costs and a PR firm might cost upwards of $400,000 annually. That is a five per cent expense drag on the entire company, every single year. If your broker tried to sell you a fund with a five per cent expense ratio, you would laugh at them. Of course, this discussion doesn’t even address the fact that small companies constantly need money and dilute shareholders with continued stock issuance. And guess what? If your stock is 10 cents, and you need $1 million in capital, you are going to have to sell a lot more shares to meet your capital budget than if your stock is $5. Our thoughts: Just forget about micro caps. Let others take these risks.
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One of the worst things for an investor or business owner is uncertainty. The latter has no idea what will happen this week, no idea over input costs, whether they should hire more employees now. The former are paralyzed and do nothing. Business will grind to a halt, which is not good for the stock market. He doesn't see an ending soon. There's a small window--inflation takes a little time to kick in, like 3-4 months, but impact on demand is immediate. People won't spend if they expect a  recession. He's waiting for the VIX to spike to 40-50 before buying.  What will Q1 earnings be and the full-year outlook? Business isn't bad for companies, but they are uncertain, which will dampen their outlooks. Don't panic or react to headlines. Quality companies will get through this. Most dividends will be okay. Buy a little gold, which is good in a crisis.

Before Jan. 20, the strategy was to buy on dips. But since then, the plan is now to sell on strength. The tariffs have a lot do with that. 80-85% of the time, the market rallies, so eventually we will return to buying dips. That said, the last few weeks have provided an excellent time to buy cheap, quality stocks. Earnings season is just three weeks away and it will be interesting to see what companies can offer guidance. In tech, look at the new trend of Agentic AI, different from existing AI, because it can pro-actively solve complex problems independently; it's not robotic process automation.

Wait. But his style is to buy or sell in 3 parts. So, he advises buy a third to be safe. The tariffs will continue past April 2 but should extend beyond end-June. Also, Trump needs to distance himself from this tariff nonsense by the mid-terms elections next year.

Losing Money in the Stock Market: Buying companies that are constantly issuing shares

Some companies use their stock like an ATM machine, continually issuing shares to raise capital and diluting existing shareholders at the same time. Yes, we know that’s the main reason for the stock market. But, companies need to be self-sufficient at some point. A company that issues new shares year after year will find it hard to grow per-share earnings, even if the top line growth looks good. Sometimes companies will need to issue shares in order to acquire another company and we would consider that different. It is the companies that issue shares all the time and then either do nothing with the capital or, worse, use it to fund ongoing negative cash flow that we caution against. For example, we will pick on one company, the one we found in Canada with the most shares outstanding. You can connect the dots. IAnthus Capital Holdings Inc. has 6.7 billion shares outstanding and its 10-year stock performance is minus 99.3 per cent, according to Bloomberg.
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We've gone from risk-on trading in 2023-2024 when the Mag 7 dominated to risk off where Europe is up and the US and AI are down. The USD is down, the Euro up by 4%. Everybody is running for covers in bonds and preferreds (yielding 5%). Diversification is paying off now. The last time the market went all in then sharply backed off en masse was 1999-2000, the internet bubble. In 2011, we saw similar volatility during the Euro debt crisis (i.e. Greece) and 2018 when Trump launched the trade war against China. Rising interest rates will hurt tech stocks and small caps and will limit the USD.

US stocks and companies won't face tariffs, but inflation as a result of them and also benefit from any tax cuts. As the US market does down, Europe and emerging markets are rising. But the EM's debt is in USD, so are at the whim of the USD, which is lagging and so EM stocks are rising. You can hold US stocks and enjoy the rest of the world. Be diversified.

Interesting, because it seems a bit more optimistic today. We've been on a rollercoaster ride for almost 2 months now with tariffs. Up and down, day to day, depending on what Trump says or is rumoured. We've even seen 2 or 3 swings in the same day.

It is unusual, because usually we see this on Fridays. Last week, Friday was down almost the entire day and then came back in the last half hour or so during quadruple witching hour. That might be helping propel markets today if people sat on their hands on Friday.

We do have rumours out there that maybe the US will cut back on tariffs somewhere. But a tweet could come out and the whole thing could change again.

Over the last month or so, NA and Australia have underperformed. China has done extremely well, and so has Europe. At a time when US is threatening tariffs against pretty much everybody, it's interesting to see the significant movement in capital with Europe and China attracting money flows.

In Europe, capital is going back in. But not to the same extent as into China, as China was more depressed. Europe has been more quietly climbing, but has held up fairly well. Historically, Europe hasn't gone up and down as much as China has. 

China's the one that's been acting well in the shorter term. He's been looking at the broad-based index, and he's seen broad strength. Consumer and tech names are both doing well, though he hasn't followed infrastructure names as closely.

When you look at country-level capital trends, you look over weeks and months rather than daily or intraday. Sizable shift over the last number of weeks, seems set to continue at least in the near term.

So far, people are continuing to see gold and silver in their traditional roles as safe havens in times of volatility. Gold's up at $3000, and silver's up at $35. They continue to run. Sometimes it looks as though gold wants to consolidate around $3000, but then it just quietly keeps creeping higher, which shows that there's a steady flow of $$ going into it.

At his firm, they primarily use point-and-figure analysis. He's also used candlestick charting, moving averages, Bollinger bands, and RSI. For RSI, he doesn't consider going over 70 to automatically be "overbought", as it can stay overbought for a while depending on the chart.

Which timeframe to use depends on your investing timeframe. Day traders might look at intraday charts; so if you're not then don't, because it's more distracting and psychologically upsetting than anything. A swing trader is someone who trades from a few weeks to a few months, and they should look at daily charts. Long-term investors should look at longer-term weekly charts.

At his firm, his hold periods are 3-18 months. So he looks primarily at daily charts.

Looking at the multi-decade chart, TSX is in a long-term uptrend. Hard to say where it might top out. Previous peaks have been tied to panics in the market. It's something we need to keep an eye on as we move into this period of uncertainty where we don't know if there's going to be a recession in NA or not.

We are getting up near the high end of the long-term trading range. The TSX has had a good runup in recent months. Will probably have a pause at some point, especially as we're around that nice round number of 25,000, but hard to say exactly when.

Most charts are based on time. Point-and-figure charts take out the time element, and use price movement. At his firm, point-and-figure charting and analysis form the foundation of everything they do. He uses percentage charts.

Here's why. The charts use rows and columns, with each row being $1 (or 1%) and marked by an "X". So if the price goes up $5, that's 5 rows up and 5 X's. Before you get into the downtrend, which is marked by "O's", you need a reversal that's called a "3-box reversal". So, if you're going up and up and up, you need a 3-box reversal to tell you that there's been a real shift.

The idea is that the trend is your friend until you have a decisive turn back the other way. This filters out the day-to-day choppiness. You're trying to distill back down to the trend; otherwise, the day-to-day squiggles in a chart can drive you crazy.

So at his firm, he uses these charts in head-to-head battles to determine where money is moving over the medium term and longer term. This method identifies meaningful changes, not just small ones.