This winter has been volatile when you look at the weather. Many parts of the country had long streaks of much warmer-than-average temperatures sandwiched between some frigidly cold runs. Precipitation seemed to arrive all at once with seemingly random choices of rain or snow. But, if you look at the whole set of data since the start of this winter, the average temperature and precipitation are probably a lot closer to average than it might seem.
Stocks work very similarly - sometimes you'll get some exciting rallies that seem to go on for weeks at a time, like the rally that has pushed North American indices to all-time highs since November. But let's not forget that this exact same time last year, indices were plummeting for no apparent reason, and the TSX was valued more than 20% less than it is today. If you look at the performance between October 2014 and today, the overall effect of these huge movements is actually quite muted:
All the action in between is but a blip in a longer time horizon. And longer time horizons are essential for proper investing. It gives companies time to grow and see the results of decisions and investments. I explored this concept of staying the course in more detail back in November, after the US election.
This brings us to this quarter's Pick Performance. As I alluded to in the first newsletter, there's a new shade in this entry - red. The most recent recommendations of Gildan Activewear and Fairfax Financial both had negative returns and trailed the TSX Composite return during the same period, which is a shown in the column I have added on the far right.
Some may view this as a case of not being able to pick winners all the time - which is a fair argument. But being the most recent recommendations, time is an important factor. It is still far too early to determine whether these recent down-trends are indicative of companies that are in poor shape, being managed badly or losing important market share. At the same time, they are companies that help balance a portfolio as they are in the reinsurance and consumer cyclical industries, contrasting with last summer's recommendations that were in financial, energy, industrial and telecom sectors. No matter how well one sector does or how appealing it may seem on any given day, being balanced is critical to smoothing out portfolio movements.
The recent rally in the TSX was propelled largely by energy, materials and financial companies, so other sectors have lagged behind the overall index. The coming month will be framed by earnings calls, which will give indications of where companies are headed in 2017. It will also allow good companies that aren't in the energy, materials and financial sectors to remind investors of solid financial foundations that are being overlooked amid all the market noise.