THE VIRTUE OF VOLATILITY
GameStop has been big news in this new year.  What’s it all about – and most importantly, what does it mean for our clients?

Here is a summary:  multi-billion-dollar hedge funds thought that shares of GameStop, a retailer of video games, were going to drop.  So they decided to short-sell those shares, meaning they would profit if the share price did in fact go down.  

However, a large number of individual investors got wind of the short-sellers’ plans, so they got together on social media platforms including Reddit and decided en masse to buy GameStop stock.  That sent shares skyrocketing, costing the short-sellers billions of dollars in losses.

This creates a higher stock price that does not accurately reflect the intrinsic value of the company.  So of course, the price came down – in this case, quickly.  A lot of the individual investors who were delighted at the lightning-fast rise of GameStop stock got burned when the price crashed: at its high, GameStop was $483 US, and as of February 18th, it was $44.94.

Why does this story matter to our clients?  Because of the opportunities it creates for us.  The GameStop story is symptomatic of a large cohort of investors deeply distrustful of Wall Street and large institutions.  These investors are more likely to believe the herd.  They have been flooding the market with money (much of it stimulus money), ignoring fundamentals like balance sheets and income statements.  They have been boosting some sectors of the market (crypto currencies and cannabis, for example) into what could be called mini-bubbles.

They have been creating, in a word, volatility. And as always, we are ready to capitalize – to buy, at a discount, assets we think are mispriced. And because these investors’ money tends to look for quick gains, there is the chance of a significant departure of that money from the market, driving prices lower and working even further to our advantage.

BUBBLES
As you can see, it all comes back to our long-time strategy.  Of buying companies we understand.  Companies with strong balance sheets, that are trading at a discount to their intrinsic value.  Companies predominantly in regulated industries and that pay dividends.  

For us, bubbles in certain areas of the market – those areas being overpriced and riskier in our view – actually don’t matter.  Because we don’t own the market. Our clients have customized portfolios, which are more advantageous than ever in these volatile times.  Because when we see parts of the market we think are undervalued, we can buy judiciously.  In the last month, for example, we added some companies we feel are undervalued relative to the market – including Enbridge, RioCan and Granite REIT.  We think they have strong fundamentals and are priced at a discount.

That said, we have recently reduced our overall exposure to stocks.  Just as we were selectively adding stocks last March and April in order to capitalize on volatility, we felt it was prudent to reduce our equity exposure and take some profit – moving that money to cash and short-term fixed income and companies we feel are currently undervalued, so we are in an even stronger position to capitalize on volatility in the future.  

It may be Biden.  It may be coronavirus.  It may be vaccine rollouts, China, or something else we don’t even know about yet.  But something will cause volatility and we will be ready as always to take advantage of it by buying the mispriced assets that result.

YOU’RE PRACTICALLY GUARANTEED TO LOSE MONEY IF…
Interest rates are at historically low levels.  What does that mean for us?

For one, especially for clients whose goal is preservation of capital, it reinforces the importance of our strategy of focusing on dividend-paying stocks (for those with a long time horizon, we don’t recommend buying any stocks at all with capital you may require back in the next five years).  

Consider a 10-year bond that pays one percent.  If interest rates go up by one percent, the value of the bond should go down by 10 percent, which means you now must hold it for the full ten years to get back to even…except that inflation and taxes mean you are practically guaranteed to lose money. 

On the other hand are dividend-paying stocks, such as the Canadian banks, for example, paying a dividend of 4-5% and the ability to increase their dividends steadily over time.  You can see, compared to that bonds right now, how much more powerful an instrument it is for protecting and growing your capital, especially after taxes and inflation.

ANOTHER GREAT OPPORTUNITY
Interest rates present us with another great opportunity:  investment solutions from the insurance world as an alternative to bonds and other fixed income investments.  Imagine an instrument that gives you the same returns as the stock market, without any of the volatility.  Because of tax advantages, these instruments (permanent life insurance for example) may be especially attractive to our clients (corporations may offer further tax advantages).  We have activated such strategies on a number of recent occasions.  
 
A NICE SEGUE
A nice thing about life insurance is that it often prompts a discussion about updating your will, which can segue into a conversation about your powers of attorney and overall estate planning.  In 2020, given the pandemic and that our clients had more time than usual to reflect, we observed that these discussions became more important to them.  Before the pandemic, estate planning was something that people didn’t think about nearly as often as now.

TAX PLANNING MADE SIMPLE
Every year, tax planning, including taking advantage of tax shelter opportunities, is more important.  Why?  Because every year the government reduces the number of tax mitigation opportunities available to us.  

Tax planning is especially topical at this time of year, as the deadline for filing your 2020 personal taxes – April 30th, 2021 – is fast approaching.

To make the process as simple as possible for you, attached are two RBC files:  2021 Handy Financial Planning Facts, and the Client Guide to 2020 Tax Reporting.  Have a look if you wish, and please do not hesitate to contact me with any questions or discussion points you may have.

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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