Pelletier: Two common mistakes that cost investors dearly in volatile times

Being self-aware can help investors make informed decisions based on facts, not just their own emotional tendencies.

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Markets have had a rough start to the year and, unsurprisingly, we’re seeing investors exhibit some of the classic behavioral flaws that can lead to big mistakes in portfolios.

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While we can’t change the trajectory of the market, self-awareness can help investors make informed decisions based on facts, not just their own emotional tendencies.

To help you get started, we’ll discuss two of the most common mistakes investors make in this type of environment. We hope that perusing them will inspire you to think differently and avoid the pitfalls that too many investors fall into.

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Anchoring in the wrong place can sink ships

I read an article this week that explored how Shopify, one of the biggest gainers of the pandemic, had fallen almost 75% from its highs, giving up all of its outperformance against the S&P 500 since January 2020.

Shopify’s downfall is no secret, but focusing on selling makes the stock look like one hell of a buy now. Now, instead, what if you couldn’t see the stock chart and I told you that stocks performed as well as the S&P500 during that period. Would that change your opinion on whether to buy or sell?

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This is an example of anchoring bias, where your analysis depends on your starting point, or anchor.

Another good example is energy. There’s no shortage of pundits advising investors to sell their oil stocks simply because they’ve doubled in the past 12 months, a case of textbook selective pegging. But what happens when you pull that anchor back a few years? Over the past five years, the capped energy index has risen only 21% and well below WTI oil prices, which have risen 106%. Using this frame of reference, one could conclude that oil stocks are still undervalued, which the company results seem to confirm.

Take Cenovus (CVE), for example. This week, it announced that its profitability had increased sevenfold, that it was tripling its dividend, removing its hedges and planning new debt repayments and share buybacks thanks to the enormous amount of free cash flow generated. by oil prices.

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The economy is not the stock market

Another common misconception that investors fall victim to is thinking that the stock market is a direct reflection of the economy.

Despite Thursday’s disappointing U.S. GDP numbers, which came off a high baseline from the previous quarter and contain a number of one-off impacts, we believe the U.S. economy is one of the few that can hold its own. storm of inflation and rising interest rates. It has a record unemployment rate of 3.6%, 11.3 million job vacancies representing a rate of 7%, and strong consumer spending which even increased by 0.7% during the Omicron wave.

That said, the Total Return SPX is off to its worst start in 34 years. The poor performance is due to the index’s heavy concentration on long-duration growth stocks which are highly interest rate sensitive. For example, prior to this year’s liquidation, Goldman Sachs research showed that Microsoft, Google, Apple, Nvidia and Tesla accounted for more than a third of the S&P 500’s return in 2021. Interestingly, to reinforce my point, these stocks rallied on Thursday’s disappointing GDP print in the hope that this will cause the Fed to slow the pace of rate hikes.

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Here in Canada, we have an opposite view of the economy, which is too dependent on indebted households that have gone all-in on real estate speculation, one of the main drivers of our growth. And they seem to be all but ignoring warnings from the Bank of Canada that higher rates are ahead. According to Live better, Canadians took on $2 billion in HELOC debt in just 28 days in February, the biggest spree since 2012, and now owe 1.4% more in HELOC debt than they did a year ago. Sales haven’t been this high since December 2020.

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While our economy looks more fragile, that doesn’t necessarily translate to the S&P TSX, which has a weighting of 32% financials, 13% energy, 12% industrials and 11.5% materials. According to JP Morgan Asset Management, these are the sectors most correlated to 10-year US Treasury yields, meaning they are the ones to hold when interest rates rise and inflation is high.

From some perspective, the S&P/TSX was actually up 3.8% at the end of the first quarter, before giving up those gains. With a 1% decline this year, it is still much better than the S&P 500 (down nearly 12%), the Nasdaq (down nearly 19%) and the MSCI EAFE Index (down 12%). .5%). Looking ahead, we believe there is still room for this outperformance to deepen.

In conclusion, vigilance to the dangers of anchoring and understanding of the fundamental interactions between economies and stock markets will allow any investor to avoid the major pitfalls that await the current markets.

Martin Pelletier, CFA, is a Senior Portfolio Manager at Wellington-Altus Private Counsel Inc, trading as TriVest Wealth Counsel, a private client and institutional investment firm specializing in risk-managed discretionary portfolios, audit /investment monitoring and advanced tax, estate and wealth planning.

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