Here are some of things I do not know, or at least don’t get, in the investment world these days
If a professional investor is claiming cash as his top investment idea, he needs to try a little harder. Photo by Getty Images/iStockphoto One thing I love about the investment world is that you can never, ever, know everything. It is usually a bad sign when a fund manager thinks they know everything, and that manager is likely to get handed a big nasty surprise in some form or fashion. There are just too many variables, acting in too many ways, for anyone to really know everything there is to know about the market.
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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 Even if you did know everything, you might still not make any money. Many times — more so than not — investors do not do the rational thing. In this scenario, you might know everything, but nobody else does, so the market will just move the opposite way. I will fully admit there are plenty of things I do not know, or at least don’t get, in the investment world these days. Here are five of them.
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0DTE options That’s the acronym for “zero days to expiration options.” In other words, options that expire the same day, often within hours. Yes, I know what these are, but I don’t get how popular they are these days. They are so popular that some are worried they will be the cause of the next market crisis. Regulators in the United States are supposedly looking into these.
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Essentially, trading 0DTE options means you are taking a three-to-five hour bet on a stock or an index. If you are wrong (on the buy side), you might lose 100 per cent of your money by the end of the trading day. If you are a seller of these, you might earn a small premium, or you might lose a bundle in a couple of hours. This is not investing; it is pure gambling.
Like any gamble, I get the math. But, seriously, just go to Vegas. At least there, you get free drinks when you are gambling. Or bet on a professional sports game. Surely that’s more exciting than simply waiting until the market closes to find out if you are rich or poor. The gamification of investing continues to be a concern.
Fund managers who recommend cash A fund manager went on TV last week and said cash was his top investment idea. I get it: the market is volatile, rates are rising and cash actually pays you something these days. But if that is your best idea then, respectfully, I think you need to try a little harder.
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Article content There are always interesting companies. There are always takeovers and special situations. With 10,000 companies in North America, I don’t get how a professional investor can claim their best idea is to put the money in the bank. To emphasize this point, a recent data screen shows 474 North American stocks up more than 20 per cent in 2023 alone.
I haven’t even mentioned fees yet. If a portfolio manager is charging two per cent for this cash idea, someone is being short-changed. Also, going to cash is, of course, market timing. It has been proven time and time again that market timing simply does not work over the long term.
‘It was obvious that company was going to miss earnings’ Monday morning quarterbacking happens in any industry, but it really gets our goat when an investor says, “I knew that company was going to miss earnings. Look how I avoided a 25-per-cent decline.” Um, no.
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Article content If it was obvious the company was going to miss estimates, then the stock wouldn’t decline so much on the news. It would have declined leading into the results. The actual decline is by itself confirmation that the news caught investors by surprise.
The S&P/TSX composite There are 11 sectors in the index. Right now, four sectors — financials, energy, industrials and materials — make up 73.9 per cent of it. Seven other sectors hardly even matter. Financials alone are 31.3 per cent of the composite right now. We know the index is market-capitalization weighted. Bigger companies get a bigger weighting. With the size of our Canadian banks, it is not a surprise that the index is skewed towards financials. But so many investors follow the index, and having four sectors making up three-quarters of their portfolio may not be the best solution for them.
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Article content We strive to have a much more balanced approach. Sure, if one owns more of the 11 sectors then they will never beat the market when banks and energy stocks surge. But we would rather see investors balance out their personal goals, rather than having the market set their asset allocation parameters.
Worldwide pessimism One last thing I don’t get is the pervasive pessimism going on in the markets right now. I get that inflation is high, and interest rates are rising. The possibility of a recession exists. The last time two-year Treasuries yielded as much as they do right now was in 2007. Inflation is causing as much concern as it did then and in 1991.
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But we bet if you had a time machine, you would go back in time and buy stocks during those historical periods. Time in the market cures most worries. Right now, we have record employment and still-strong corporate profits. Jobs and profits are offsets to rate and recession worries. The market never goes straight up, of course. But being pessimistic just because everyone else is doesn’t often work out in the long term.
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 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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