Monday, November 9, 2009

STOCK MARKET UPDATE

Stock market update: What have markets been doing and what should we make of it?

Greetings to you all.

As you know, I often like to start a current market update by looking at what I wrote in a previous market update. It keeps me honest and allows me to develop a theme. In my market update of March 23, 2009, I wrote--

So for money you've already invested, patience and staying invested are essential. If you have cash on the sidelines that you want to grow? Take advantage of this bear market by investing before it's over, not after.

As it turns out, I was wrong about one thing and right about the other [more important thing]. Looking back 6 months from today, we can see with hindsight that March 23 was actually 2 weeks after the end of the bear market. I was right about my view that March 2009 was an excellent time to invest in stocks. Since the market low of March 2009, the Toronto Stock Exchange [TSX] is up 48%, the US stock market [S&P500] is up 60%.

So 2009 has provided good news for investors and the bear [bad] market, which began in the fall of 2008, has been followed by a bull [good] market and patience has been rewarded. Yes, we are looking for more growth to get us back to where our portfolio was, but the strong recovery of 2009 should provide us with confidence the next time we experience a bear market.

Now we turn to the questions of the day. Does the global economy still face challenges? Yes, the banking crisis of 2008 that helped trigger the bear market will not be fixed overnight. And if we want to look for economic things to worry about, we can certainly find them.

Why have stock markets gone up so much in spite of lingering economic problems? Because stock markets anticipate good news [they are what we call a "leading indicator"]. Investors pushed up markets [1] not because they believed the recession was over, but because they felt confident it would end sooner than anticipated, and [2] as they saw markets recover, they wanted to participate.

Here's the last question I want to deal with, one that is most important to investors—Going forward, can we rely on our investment in stocks to grow our money so that we can afford to live when we retire? The answer is it depends. Let me explain.

The most important thing about buying stocks is to buy the right companies. You know the old saying that 50% of doctors finished in the bottom half of their class. The same is true of companies: as an investor you want to own the best companies that will grow their stock price over time because they are better at what they do than their competitors. Better companies do well, regardless of broader economic conditions, because they take existing business away from other companies. How are we going to pick the best companies when it's not an easy task? [You won’t do it by buying index funds which are blind pools, but that’s for another newsletter.]

An important part of my job is to find those mutual fund managers that can identify the best companies to own. These managers will be unusually smart and dedicated to ongoing research and being on the road to meet with company executives. Only this way will these managers really understand a company and identify opportunities. The fruit of that talent and labour will be shown in the out-performance of their mutual funds compared to the competition and the index. This outstanding performance helps me to identify them as I compare the performance of the 5600 mutual funds available in Canada.

The other way I identify the top managers is to meet with fund managers throughout the year. I, and about a dozen other financial advisors, had lunch yesterday with Geoff MacDonald of Edgepoint Wealth. Geoff spoke about the work that went into discovering two of the companies he's bought for investors in his mutual fund, and how these companies have an advantage over their competitors that should result in a rise in the value of the company's stock. Geoff was insightful, excited about what he had discovered, and he had good answers for the questions I asked. And I can tell you that not all managers pass the test as well as Geoff did for me.

I’m excited to tell you about one of the companies that Geoff has invested in, Ryanair, but I’ve written enough for now. I will say more in my next newsletter which I will send out soon.

For investors, a mutual fund can look like nothing more than a name on a statement that’s there month after month. In reality, the funds I choose for investors are all about what’s behind the name: the investment managers that I have researched and chosen because I know them well enough to respect them and what they’ve accomplished. The manager’s ability and dedication to buy good companies is what we rely on to grow our money. History shows that good managers are able to do this for us over time, regardless of economic conditions.

Watch for my next newsletter.

Bye for now,

Tom

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