Peter Hodson: If markets are said to climb a wall of worry, then we must be in for an incredible market rally based on the number of worries out there
There is always something to worry about in the market. Right now, there’s plenty. Photo by Brendan McDermid/Reuters It’s mid-January and my brain is still on vacation. All the market gyrations, United States Federal Reserve news, COVID-19 rules and a giant freeze up across Canada make it hard to connect five themes this week. Instead, let’s go with five random (rambling?) market musings.
Advertisement This advertisement has not loaded yet, but your article continues below.
If markets are said to climb a wall of worry, then we must be in for an incredible market rally ahead of us based on the number of worries out there.
What is there to worry about? Inflation, higher interest rates, Kazakhstan, Taiwan, oil, profit margins, asset bubbles, tapering, China, Turkey, cryptocurrencies, COVID-19, Delta, Omicron, house prices, wage inflation, supply chain issues, labour shortages, weather, climate change, recession. Have I missed any?
There is always something to worry about in the market. Right now, there’s plenty. Markets are very good at discounting concerns. That’s why the market usually rallies in the middle of a recession — investors are looking forward to the good times to come. Based on all the worries out there right now, what do you think markets will do if we actually get some good news for a change?
Advertisement This advertisement has not loaded yet, but your article continues below.
Seriously, investors, get over yourselves, this is not the first time in history interest rates are headed higher.
Investors absolutely panicked during the first week of January, selling any and all growth stocks. Some stocks started the year off with 25 per cent declines. How’s that for a wake-up call? The reason: higher interest rates. Of course, this was discussed all last year, and the Fed in December told investors there were eight rate hikes planned — eight. We are not sure why investors took three or four weeks to decide this was not a good thing for growth stocks.
But is it that bad? Rates have been raised before, and stocks did just fine. Higher rates are what happens when an economy is strong. The U.S. has 3.9-per-cent unemployment for gosh sakes. It’s not like we are in a recession or anything. Maybe it’s time to be less bearish.
Advertisement This advertisement has not loaded yet, but your article continues below.
Are cryptos the next tulips? The famous Dutch tulip bubble is considered a classic bubble, where investors lost rationality and bid up the prices of tulips, which had nominal real value, to outrageous amounts. Sound familiar?
Are cryptos the next tulips? Photo by Piroschka van de Wouw/Reuters The cryptocurrency diehards don’t quite realize that a cryptocurrency’s value is only what someone else will pay for it. Bitcoin has been around for 12 years, and, last I checked, hasn’t exactly gone mainstream. As a store of value, it leaves a lot to be desired, something highlighted by its 40 per cent decline since September. Its utility can be debated, of course, and proponents have produced vast quantities of studies and are very vocal in their support of cryptocurrencies. But our bet is future economic students will have part of their course curriculum dedicated to the “Great Crypto Bubble of the Early 2000s.”
Advertisement This advertisement has not loaded yet, but your article continues below.
It’s a new year, and investment dealers and brokers have a new regulatory rule: Product Due Diligence and Know-Your-Product.
Hard to believe, but brokers for the first time need to actually know what they are selling to you, the client. How this was not implemented 50, 60 or 100 years ago is beyond me. Having your broker know what they are pitching seems like pretty basic stuff.
Of course, many investment dealers have spun this rule to their advantage by banning third-party funds and other products, because “they don’t know them well enough.” Sometimes you just have to shake your head.
Over the holidays we read a great book, The Psychology of Money. One section stood out for us. The author highlights how, under the right conditions, an amateur investor can do just as well as the professionals, or even better. In no other industry or career is this truly possible.
Advertisement This advertisement has not loaded yet, but your article continues below.
More On This Topic Five investment themes to watch in 2022, including the rise of small caps and value stocks The compliance officer who robbed banks: Five true tales from the investment industry trenches The compliance officer who robbed banks: Five true tales from the investment industry trenches Five things that make up an investing professional’s ‘working day’ Think of a brain surgeon. Could a wannabe surgeon with no formal training succeed and be as good as a surgeon who studies for decades and trains for years? Not a chance. Could a person off the street design a complex engineering structure? Not likely. Am I going to be drafted by the NHL because I can skate a bit? Um, no.
But in investments, if a regular guy uses common sense, puts in enough investment time (this is key), doesn’t trade a lot, keeps taxes low and keeps fees low, they are more than likely to beat the majority of investment professionals.
This advertisement has not loaded yet, but your article continues below.
Article content As a sub-header of one chapter of the book states: “You can be wrong more than half the time and still make a fortune.” Keep this in mind the next time you are complaining about one of your stocks declining. If you have some winners — and some time — it likely doesn’t matter as much as you think it does.
Financial Post
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
_____________________________________________________________
If you liked this story, sign up for more in the FP Investor newsletter.
_____________________________________________________________
Financial Post Top Stories Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.
By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300