June 7, 2016 – Many investors and analysts made some bad calls in 2015 in a number of areas ranging from interest rate movement to oil price predictions. “So, what else is new?” you ask.
Some were armed with the research, industry contacts, experience and knowledge of how the markets work. You might think all these tools would help them enrich themselves and their clients. To no avail, as oil prices collapsed (taking the Canadian dollar with it) leaving global markets in disarray.
In this column, I will explore some of their biggest and costliest miscalculations and why they occurred – and why others of equal or greater magnitude will keep occurring. I’m not cursing active management. For some investors, this provides them with the experience they seek and they are happy to focus on the prospect of significant short-term gains at the expense of more consistent long-term wins.
Despite evidence that this strategy can be very expensive, they continue to place bets through active managers. For example, in 2015 only 39.62 per cent of actively managed Canadian equity funds outperformed the S&P/TSX Composite Index over a one-year period ending June 30, 2015. That number falls to just 23 per cent over a five-year period. Managers have a tough time being consistent, although some may have good years and then trail off. An investor has no control over an active manager’s choices whether he or she has a good or a dreadful year.
In support of asset-class management, I wrote in 2012 that the debate between asset-class and active management styles goes back to the famous 18th century Scottish social philosopher and pioneer of political economy, Adam Smith. Yet, many years later it remains unresolved in many investors’ minds. This is the result of active managers offering them incentives (the chance for substantial and quick investment returns) rather than evidence. After all, a lucrative and influential industry, which includes most of the mainstream media, has every reason to keep the debate going. Investors who place their hope in their advisor’s stock-picking skills are less likely to jump ship for lower-cost (and lower-margin) asset-class management-based, or passive solutions.
Mistakes will be made for as long as stock markets exist and investors and market “experts” try to actively gain from random and complex events they cannot control, but only try to predict.
“It’s tough to make predictions, especially about the future,” is a quote attributed to Yogi Berra. I am not sure why so many people like the quotes of the late veteran of 14 World Series Championships. Maybe it’s because his sayings throw people off with their simplicity when they are looking for something deeper and more complex to challenge them.
That’s often true of investing. Investors who are not content to follow proven strategies often end up in trouble by making investing more complicated than it needs to be. Veering away from these strategies can make their lives unnecessarily complicated and trigger some costly investment decisions. (As you will soon see, 2015 was no different).
This column describes many investors who keep returning to investment strategies that get them in trouble while expecting a different result.
Monkeying around?
History has proven stock picking and market timing to be games of chance, regardless of how sophisticated the equity research or economic measurement engines. For example, in 1999, a chimpanzee actress in L.A. named Raven posted a 79 per cent gain in her portfolio, then swung a 213 per cent gain the following year. Raven, whose picks were tracked by the now-extinct MonkeyDex.com, amassed her fortune by throwing darts at a board containing 133 Internet-related stocks. As a result of pure luck or innate jungle instincts when it came to dart throwing, Raven would have ranked as the 22nd most popular money manager in the United States if she had actually been managing money in 2000.
[Source: www.dailyfinance.com/2011/08/03/in-honor-of-planet-of-the-apes-the-top-3-monkey-stock-pickers/]
Although no one I know has hired a monkey to pick their stocks, the surprises of 2015 caused some investors to re-evaluate all aspects of their portfolio for a successful investment experience.
Here are three examples of 2015’s most prominent miscalculations.
Oil prices
Forecasters did not expect to see oil at $50 (U.S.) in 2014. And they didn’t expect it in 2015, either, forecasting average oil prices of $65 to $70 for the year. Many were hoping (hope is not a strategy) that OPEC countries, having declined to cut volume late in 2014, would finally curtail production and stabilize oil prices in the first half of 2015. As well, many experts underestimated the extent of the global slump in emerging markets due to headline data that understated China’s marked deceleration. As a result, forecasts with a 2014 date on them were too optimistic about Canada (and the U.S.). Many economies suffered from the dramatic decline in oil prices and took those who remained sold on bullish “Texas Tea” predictions down with them.
The Loonie
In another example of misguided assumptions in 2015, many forecasters were expecting that the loonie, in U.S. dollar terms, would be worth between 82.75 cents to 85.5 cents. This hope was bolstered by the assumption that oil would be worth approximately $70 a barrel. As a result of the drop in oil prices, the loonie hit a new 12-year low during the week of Dec. 14, closing on the Friday at 71.71 cents. The 16 per cent decline was the second-largest annual drop in the currency on record. Only 2008 was worse.
Interest Rates
Many economists were caught flat-footed when instead of raising interest rates as many predicted, the Bank of Canada lowered rates on Jan. 21, marking the first of two decreases in 2015. This was as a result of the U.S. Federal Reserve holding rates at zero for longer than expected, despite U.S. unemployment falling to 5 per cent. In reaction to this, the Bank had to cut rates to lower the Loonie and support exports.
I will close by sharing my five basic strategies to help keep you out of trouble in the investment arena.
- Don’t try to predict the future or time the market.
- Develop a good relationship with an experienced financial advisor who shares your values and understands your needs.
- Remember that most active portfolio managers have historically failed to match the returns of the market.
- Establish investment goals and commit to a strategy that you can revisit as your financial needs evolve.
- Read print and electronic media with a grain of salt. They can gain your attention and make you wish you were invested elsewhere – today. That is just entertainment.
- Remain focused on the long term.
Jim Sanderson is a wealth advisor team with 28 years in the investment services industry. The Jim Sanderson Group at ScotiaMcLeod specializes in creating and distributing wealth for successful individuals and corporations in the aggregate and road building industries across Canada. He helps his clients supported by a team of experts in insurance, merchant banking, trust and estates. Jim can be reached at jim.sanderson@scotiamcleod.com and his website is located at www.jimsandersongroup.com.
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