Peter Hodson: Doomsayers are rubbing their hands with glee, saying, ‘I told you so’
The normal stuff doesn’t matter right now, and this makes an investor’s life exceedingly difficult. Photo by Timothy A. Clary/AFP via Getty Images Most of the time, I love my job. Watching the markets, analyzing companies, making investments, talking to investors, answering questions … it’s all a blast, and every day is different.
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Once a decade or so, however, my job is not so much fun. Every day becomes a grind, investors are in a foul mood, it’s tough to make money and the things that usually work don’t work at all. Thankfully, these periods are rare, but they are very hard when they do come. At times, self-doubt kicks in and nothing you do seems right. This is one of those times. My job is tough.
For the contrarians in the crowd, though, I should point out that whenever I hate the market, it is usually a sign of a bottom. I am a natural optimist, and this view has served me well over 40 years in the market. I have, so far, survived it all: crashes, terrorists, financial meltdowns, multiple wars, high interest rates, low interest rates, pandemics and financial scandals. Let’s take a look at five reasons why investing is not much fun right now.
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Doomsayers are rubbing their hands with glee, saying, ‘I told you so’ There is a big group of doom-and-gloom prognosticators out there who constantly predict market crashes. They are right every once in a while, but they, of course, can be wrong for decades. If you’re following the financial news on Twitter, you might get so depressed and sell everything anyway.
The doomers are gleefully predicting more declines in the market, hoarding gold and shorting the market. But — as always — these folks will all be wrong, eventually. Markets are very good at pricing in news. When everyone is bearish, that’s usually a bottom. All the selling has already been done. But seeing the doomsayers happy makes me miserable and it worries me that people follow their advice after the market has already corrected (yes, it is an official correction now).
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Article content Stocks declining 30 per cent in a day is not normal Meta Platforms Inc.’s stock fell 26 per cent on Feb. 3. The drop in one company’s value was more than the market capitalization of 80 per cent of the companies making up the S&P 500 index. We only highlight Meta because it is so big. But 30, 40, even 50 per cent declines are commonplace in today’s market. No wonder investors are nervous when any company can get hit anytime. Shopify Inc. is down 54 per cent this year, and we haven’t even started the third month yet.
Certainly, these types of moves counter the efficient market thesis. If a large company can drop 40 per cent in a day, then markets are either not efficient, or investors are reacting the wrong way (hint, it is probably the latter).
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Article content Stocks of companies reporting great earnings and guidance still get smashed An investment professional’s job is to pick good companies. Most of the time, I think I am pretty good at this, or at least have been historically. So it is frustrating when you pick what you think is a great company, and it does exactly what it is supposed to do, and then the stock goes down 10 per cent nonetheless. You know what I’m talking about.
Five so-called rules for younger investors that need a reality check Five reasons women are better investors than men Five market musings as the year gets off to a worrisome start This year, dozens and dozens of companies have reported very strong results and very strong guidance, only to see their stocks get pummelled. The results, pundits say, were not good enough. Most times, I would beg to differ. A company reporting 40-per-cent sales growth instead of the expected 20 per cent should be rewarded by investors. If they were expecting 50 per cent instead, then the stock should have already reflected this. Investors can’t be positively surprised and then get upset and sell the stock, yet this is happening every day in this market. Argh.
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Investors still focus way too much on quarterly results We will be brief with this point, as it is not really unique to this point in time. Investors ignore companies that are building for the future. It is all about what they have done in the past 90 days. Public companies can, therefore, be reluctant to spend on growth initiatives, to their long-term detriment.
Using Meta again as an example, it says it plans to spend about US$10 billion building out the metaverse. This could be a huge source of profits down the road for the company. But investors don’t care, because it costs them money now. Investors seem to forget that spending for the future is how Amazon.com Inc. became one of the world’s largest and most-dominant companies.
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Article content Today’s market makes an investor feel stupid My job is to analyze companies, not to become a geopolitical expert or inflation forecaster. But that’s what investors have to do these days and it is not fun. You might find the greatest stock in the world, but it could still go down because inflation ticked up more than expected. Or, your company, which only operates in Canada, might decline because Russia is making moves in Ukraine.
For more than two years now, I have had to become an expert on pandemics and government responses to them if I wanted to make any money in the stock market. The normal stuff doesn’t matter right now, and this makes an investor’s life exceedingly difficult. Here’s hoping we get back to normal one of these days. I prefer a fun job.
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.)
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