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

Common Investor Mistakes: Anchoring Bias

A classic mistake by new investors who may want to ‘anchor’ their beliefs to a specific value or price. Typically when a stock or the market as whole moves beyond a previous threshold (such as an all-time high), investors might anchor their expectations to that certain price, and begin to feel that any price above all-time highs is too much. 
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The S&P is making new highs, there's optimism that inflation will be tamed and a recession avoided, but beneath the surface are cracks. We're seeing the widest dispersion between GDP and GDI in 20 years. GDP has been growing, while GDI (income) is flat or slightly negative. GDP appears to be doing well, but the economy is living beyond its means. Consider record-high credit card balances while in December in the U.S. the savings rate was 3.6%, among the lowest in decades. Employment numbers are contradictory, with companies reporting few job losses, but households reporting more when surveyed. This lack of spending power will put downward pressure on inflation, and falling interest rates will benefit stockholders (particularly Canadian dividends) bondholders and real estate. But this move is taking its time, not fast.

Annual ETF conference in South Florida giving investors details on new ETF products (Bitcoin very popular). CPI reading this week will be indicative on state of economy. Expecting a slight uptick on inflation. Believes market is over confident in amount of upcoming interest rate cuts. Upcoming corporate earnings (especially NVIDIA) will be interesting to watch. Suspects NVIDIA is due for a correction, and is short on the company (valuation way too high). 

Best strategy that thematic/portfolio construction investors can do is think about how they can separate themselves from index funds. Would advise potential investors to build 50-60% of portfolio in index funds, and then add riskier/unorthodox assets (ETF's etc.). Other examples of different assets classes include renewable energy business which are currently out of favor. Out of favor utilities/medical marijuana are also out of favor sectors that would add beta to an investor's portfolio. 

Market Overvalued?

Let’s look at an example of when the market was ‘overvalued’ using the forward P/E multiple for the S&P 500. We can see that in mid-2020 when the markets were recovering from the rapid drawdown earlier in that year, the forward P/E was at a staggering 25X. Yet, Over the next four years, the market gained 60% (roughly a 14% CAGR), AND the forward P/E came down to 20X. This is just one example of why basing one’s investment decision based solely on one figure and estimate can be misleading. As a reminder, it is not timing the market that is important, but time in the market. 
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This year 40% of the world's population is voting in an election. 70% of the population is down the middle and just trying to get by. The macro economic situation has a lot of potential to get markets going but inflation has been a challenge. Governments all over have borrowed a lot of money (as have individuals) so the share of their tax revenue going to service debt is increasing, which means less for social programs, services, etc. This in turn affects politics. The Fed doesn't want to cut rates prematurely and then have to raise them again so they will wait longer. Getting rates down to a 2 to 3% level will be stretched out and we shouldn't expect a return to ultra low rates.

The question was on emerging markets. You want to be in the India market over the next 10 to 15 years, and not in China. India has a growing population with demographic tailwinds. A specific suggestion is HDFC (HDB), the second largest bank in India.

The question was on Bitcoin. He is not interested in it as an investment. Maybe it could have value as a hedge against inflation. He hasn't quite figured out just what it is for. If you want to own some, just take a very small position but watch it carefully.

This rally can continue, but he expects a pullback late this month. We had a similar conversation 12 months ago. But it's interesting that industrials and transports are starting to break out. Take profits, but keep your core holdings.

Believes interest rates will play major role in economy going forward. Seeing rise in unemployment and weakness in markets, combined with mortgage stress. If rates are lowered too quickly, inflation will rise again and sink economy further. Higher earnings results also worth watching as latest quarterly results come in. China appears to have consumer deflation, but appears that economy is poised for growth. Foreign investors skittish on investing in China (political risk) - making economy slow. Expecting NVIDIA to drop off soon - very over valued. 

Market Update:

Canada’s labour market started the year with the largest jobs gain in four months, the unemployment rate fell to 5.7 percent, adding 37,000, but wage growth cooled, suggesting the central bank is not facing pressure to cut rates. On the other hand, a minor adjustment was made to the consumer-price index (CPI) for December 2023, revising down by a tenth, to 0.2%, confirming the Fed is done raising rates. The Canadian dollar was 74.27 cents USD. The U.S. S&P500 ended the week up 1.3%, while the TSX was slightly down 0.3%.

Another week of greens and reds mixed. Energy added 1.5%, while technology and industrial staples added in the 1.3% range each and real estate gained 0.9%. Materials and consumer staples gave up 2.7% and 1.1%, respectively. Consumer discretionary edged down 0.7% while financials ended the week slightly down 0.2%. The most heavily traded shares by volume were TELUS Corporation, Enbridge and Bitfarms.
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Almost at 5,000. This is a big moment. He remembers at the start of his career, the Dow broke through 10,000 in 1998, hats on the floor and everything. It's the old story, where the Magnificent 7 or the top 10% of stocks are really contributing to most of the rally, and a lot of stocks are not participating that much.

Capital light, excellent free cashflow. Even though they were doing the heavy lifting for this rally, they were very soberly priced. Not AAPL, but META, GOOG, AMZN. 

Since the latest run over the last 6 weeks, they aren't as generously priced as in the previous 3 months, but they're not crazy. AMZN, for example, is 28% growth rate, trading at 30x, PEG ratio is a bit higher than 1, but still OK. Even names like NVDA still make sense.

The growth rate of a company compared to its PE multiple. Under 1 is desirable. Near 1 is fine. If you have the growth rate, slightly over 1 is fine, too. So a 20x multiple's OK if a company's also growing profits at 20%.