As of last week, Twitter was down 55% from its high in the last year. Zoom was down 74%. Peloton was down 84%. Virgin Galactic was down 85%.
Good thing we don’t own any of those companies.
As of last week, the NASDAQ was down 13% this year, the S&P 500 was down 9% and the TSX was down 5%.
Good thing we don’t own the market.
That is why, amid a market correction, our clients’ portfolios are approximately even – significantly outperforming the market.
Our portfolios also generated above average returns in 2021, which were also well above the returns required to meet our clients’ long term financial planning objectives. All due to the durability of our long-time strategy, founded on the principles of Warren Buffett and Berkshire Hathaway. We have mentioned it in some past editions of Marche Monthly, and the full strategy can be reviewed here, but for the moment, here are some highlights especially relevant to the current situation:
• Above all, we focus on preservation of capital.
• We buy companies that we understand, that have strong balance sheets and a mastery of the fundamentals, are predominantly in regulated industries and that pay dividends.
• Our portfolios are not the market, but instead are customized to each client.
• We keep our portfolios defensive. We buy companies that we believe are trading at a price below what we think is intrinsic value, which therefore gives us a significant margin of safety.
Why didn’t we buy a company like Peloton, for example, which so many people have been talking about since the pandemic began? Simple: it did not align with our strategy. We believed it was too expensive, and we knew it would likely never pay a dividend. And that it was not strong on the fundamentals. And now that the market is returning its focus to the fundamentals (i.e. it is becoming less speculative), Peloton is getting hammered.
It was a sexy company, all right. Meanwhile, the more “boring,” dividend-paying companies we focus on are very much holding their own.
TECH HAS IT TOUGH
You may have noticed that the suffering companies I’ve mentioned are all in the tech space. Why are technology companies getting hit so hard? Because rising interest rates disproportionately affect that sector. Tech companies’ earnings are more speculative: the nature of innovation means their earnings are further in the future than companies in other industries. When interest rates are low (especially ultra-low, as they have been in recent years), those future earnings are worth more. But when interest rates rise, those earnings are suddenly worth less: and now that interest rates are rising and the expectation is that they will rise even more, stock prices in the tech sector are plummeting.
Online sports betting company DraftKings, down 70% from last year’s all-time high, is another cautionary tale for investors tempted to ignore the fundamentals. Amid the worst of the pandemic, gamblers couldn’t go to the casino and sports fans couldn’t go to see their favourite team in person. So the casinos and the major sports leagues – both in desperate need of revenue – got together with the support of US state governments also gasping for cash, and quickly expanded the legalization of online gambling.
The market reacted very optimistically, driving up DraftKings’ share price exponentially. To put it another way, the market priced in far too much optimism. And now, with interest rates on the rise, the tide is going out. And we’re finding out which investors were skinny dipping without a sound strategy such as ours.
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“Only when the tide goes out do you discover who's been swimming naked.”
Warren Buffett
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And finally I will point out GameStop, which we covered in detail in the February 2021 edition of this blog – as another fine example of the mess speculative tech companies are in, down 80% from its high in 2021.
THE BEST WAY
The expectation of higher interest rates, driven by higher inflation – that’s what is unnerving the market right now. We think the best way to defend against these two issues are:
-to invest in companies that have a large margin of safety (see above) and the ability to pass on price increases to their customers, just as our companies do.
-as part of our fixed income strategy, hold bonds with short terms to maturity. In fact, longer term, rising rates are better for the fixed income portion of our portfolios, as we can reinvest maturing bonds / GICs into new ones paying more interest.
IMPORTANT DEADLINES
Some key dates are coming up. Is there any planning you want to get done beforehand? Just let us know.
Here are three especially important ones:
March 1: last day for 2021 RRSP contributions
May 2: last day to file your 2021 personal tax return without penalty
June 15: last day to file your 2021 personal tax return without penalty if you are self-employed
For other key dates, a list of information required to complete your 2021 tax return and a handy list of potential tax slips you may receive from RBC Dominion Securities, please click here.
CONFIDENCE
As I said in the December 2021 issue, 2021 was a very positive year for our clients’ portfolios. One month into the New Year, we continue to look forward to 2022 and continue to have confidence in our strategy. Ups and downs in the market are normal, and we have been very judicious about positioning you to take maximum advantage of that volatility.
If you ever have any questions about anything you read here, please do not hesitate to contact me. On behalf of the entire team here at Marche Wealth Management, I wish you a very Happy New Year!
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com