Beating the odds

Jan 15, 2016 | Dian Chaaban


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Earlier this week thousands of Canadians went Powerball bananas finding creative ways to buy their lucky ticket for Wednesday’s estimated US $1.5 billion jackpot (ahem, that’s ~2.18 billion Canadian) – the largest jackpot in US lottery history. Despite our efforts and wildest foreign exchange dreams, 3 winning tickets were sold in California, Tennessee and Florida.

 

I agree that it’s fun to imagine what it would be like to win billions, I’m rational enough to consider the odds – and in this particular case, the odds of winning were about 1 in 292 million. To put that in perspective, I am 29 times more likely to get hit by parts falling off an airplane on my walk to work one day (at 10 million to 1 odds) that I was likely to win the Powerball.

 

So what are your odds of timing the market right? Market timing often looks at moving averages such as 50- and 200-day moving averages. Some technical analysts believe we are bullish if the market has gone above the 50- or 200-day average, or bearish if below; they then predict what the trend will, more likely than not, continue to be in the future. Others claim, "nobody knows" and that world markets are of such complexity that market-timing strategies are unlikely to be more profitable than buy-and-hold strategies.

 

Recency bias is the tendency to think that trends and patterns we observe in the recent past will continue in the future – a dangerous bias to have during times such as these because it leads investors to become less risk averse when markets are high and more risk averse when markets are low (a scenario that will actually result in less wealth in the long-term compared to someone who consistently invests over a long period regardless of market trends). Peter Lynch said it best when he said that "far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves."

 

Some of you may have seen or heard of the note that the Royal Bank of Scotland (NOT the Royal Bank of Canada) sent to their clients suggesting they Sell Everything. According to this article, the piece apparently uses some pretty big and ominous words such as “cataclysmic”, “Fibonacci”, and “bear flag” – adding fuel to the flame.

 

Henny Penny/ Chicken Little/ Chicken Lichen... call it what you will, but those claiming the sky is going to fall will always be around. In the words of Prem Wastsa (aka The Canadian Warren Buffet), “trees don't grow to the sky and markets and markets don't go to the floor, or zero”. So while concerns about China and oil weakness certainly have merit, many economists and yours truly believe that this is way over stated.


If the determination is to sell everything, you have now positioned your portfolio for one possible outcome – Armageddon – akin to going all-in on one number in roulette. Humor me for a moment and turn back time to scenarios where you could have adopted this stance on a number of occasions over the past 20 years, including, but not limited to:


• The Asian Financial Crisis (August of 1998) – Down ~7,000

• The first Greek Grexit (May of 2010) – Dow ~10,000

• U.S. Debt Default (August of 2011) – Dow ~11,000

• The second Greek Grexit (June of 2012) – Dow ~12,000.

 

In the moment, all of these things seemed like the end of the world with a myriad of unknowns and in all instances, going to all cash would been the wrong call. Of course, in 2008 it would have been the right call, at least for a time. But when would you have gotten back in? It’s worth noting that once everything has been sold, actually getting back in is very hard to do.

 

Not to sound like a broken record on this front, but times like these are when the market throws in the good with the bad and good businesses with quality management teams, strong free cash flow and good balance sheets go on sale with everything else. You may not catch the absolute bottom in these things (I would never claim to), but gradually putting some money to work in these names has historically paid enormous long-term returns. Continuing to position your portfolio with some non-Canadian exposure is vitally important, as the Canadian economy may be fighting a tough fight for some time to come…

 

Its weeks like these that truly identify what it is I genuinely do as an Investment Advisor – focusing on the fundamental qualities that make an investment a good one and sticking to a disciplined plan during a time when it’s easy to become chronically pessimistic from the countless negative headlines programmed to make us nervous.

 

So, Yes. I know it’s miserable, but these are the times when we all need to listen to our heads and ignore our hearts. The flight response is a natural feeling but running away is the worst thing we could do right now. We saw it in 2008/2009 – investors who ended up losing money were those who panicked. So yes, stay the course. It’s the hard thing but the right thing to do.