There’s a lot of money to be made in highly cyclical industries by managing the lag effect
A trader works on the floor of the New York Stock Exchange. Photo by Brendan McDermid/Reuters files One of the delights of driving an electric car is the pasted-in-your-seat acceleration. There’s nothing like it. You push the pedal and the smile on your face is instant.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Unfortunately, managing investments isn’t like that. The analogy is more like a driving experience from the past: turbo lag. The power and acceleration may be exhilarating, but there’s a pause before it kicks in. For investors, the impact of a decision often takes time to show up, and, unlike my 1983 Volvo Turbo, when I knew how long it would take, the length of the wait is indeterminable.
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I’ve previously talked about a high-profile lag related to last year’s shift in monetary policy, namely higher interest rates. Commentators have been marvelling at the resilience of the consumer and the overall economy without acknowledging the time needed for higher rates to filter through the economy.
Turbo lag occurs throughout the investing world, although, like the current economic commentary, it may not seem that way. If you watch the business networks BNN and CNBC, the market appears to behave like a Tesla off the line. Stocks jump and dive on news announcements. A better-than-expected earnings report causes a stock to pop. A subdued outlook has the opposite effect.
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Article content Indeed, it’s almost automatic. Cost cuts, share buybacks and purchases by activist investors push stocks up for the day or week. Looking back a year later, however, the move doesn’t even show up on a stock chart. The reality is that immediate reactions are often short lived and have little to do with the long-term success of a company, and its stock.
A new CEO may get credit for a good quarter (which may have been in the bag before they started), but, ultimately, the grade on their report card will depend on their drive, strategy and management skills over a number of years.
Market reactions to acquisition announcements are fraught with errors. I’ll never forget a former colleague calling CAE Inc.’s 1988 acquisition of Singer. Co’s Link flight simulation and training systems division the “Deal of the Century.” It was a disaster. In 2000, Telus Corp. was in the doghouse after announcing it was buying Clearnet Communications Inc. As it turned out, going national in cellular was its deal of the century.
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Article content Generally, I’m wary when cost-cutting CEOs become media stars. Promising to improve profit margins is a reliable way to move a stock, but the sizzle is often better than the steak. Targets aren’t reached, and/or the company’s long-term competitiveness is compromised. Invariably, the next CEO needs to invest in the business and play catchup.
There’s a lot of money to be made in highly cyclical industries by managing the lag effect. Capital for expansion dries up when metals and minerals, lumber, semiconductors and other cyclical products are down, which has a predictable effect when demand increases. Markets get tighter and prices skyrocket. As the saying goes, the solution to low prices is low prices.
Of course, the wait is often difficult. Losses can be large, and turnarounds delayed. Shareholders in lumber companies never seem to wait long for the next cycle, but Cameco Corp. investors waited a decade for the uranium cycle to kick in.
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Article content The most challenging time lag you face as an investor comes when setting up a retirement portfolio. What matters is achieving your long-term goals, but you won’t know if you’ve been successful for decades to come. You’re forced to measure the progress of your 20-plus-year plan using one-, three- and five-year results. It’s a highly flawed feedback loop.
A bad year along the way isn’t likely to be important, but how do you know it isn’t a harbinger of long-term disappointment? The answer is you don’t. But you can put the odds in your favour by doing the things I regularly talk about:
Things that should make investors worry they’re not on the right track 3 important investing terms that confuse investors to their detriment 3 reasons why investing now is better than in the go-go days of 2021 Advertisement 6 This advertisement has not loaded yet, but your article continues below.
Have a plan that has a clear purpose and time frame for the money.
Build a broadly diversified portfolio that fits with your goals and personality.
Develop a routine that helps you stick to the plan, making only small adjustments based on life changes, not economic forecasts.
Keep costs down.
And, finally, work with people who enable you to be at least a little contrarian. In the context here, that means being patient with high potential, well-valued stocks that are going through their version of turbo lag. Because if predictable, instant acceleration is what you’re looking for, you’ll have to buy an EV.
Tom Bradley is chair and co-founder of Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com.
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