Making money in troubled times

By Murray Belzberg | October 1, 2010 | Last updated on October 1, 2010
4 min read

Recently, in a column in The Globe and Mail, a respected chief economist with a large Canadian investment management firm declared the ongoing economic malaise in the U.S. is, in fact, a full-fledged economic depression, not simply a garden-variety recession.

The evidence he presented was compelling:

  • Scarce credit availability;
  • Record-high levels of lasting unemployment;
  • Feeble discretionary consumer spending with few, if any, signs of revival;
  • Moribund home sales, despite unprecedentedly low mortgage rates;
  • The reality of government stimulus spending being virtually the sole source of economic fuel in many quarters;
  • Anaemic U.S. Treasury bond yields;
  • Grossly inflated government and personal household debt.And the list goes on.

    The counter to all this doom and gloom, however, can be found in the daily financial headlines, if one has any motivation left to look:

  • Unemployment claims have improved marginally and retail sales are proving to be better than expected – a sign that increased demand for goods is starting to creep back into the economy;
  • Junk corporate bonds (high-yield debt) are being voraciously snapped up by investors eager to reap the rewards of a reviving corporate credit market;
  • Government bond market activity suggests there’s some reduced anxiety around the potential default status of borrower nations like Hungary and Ireland; and if that isn’t enough, North American and European equity markets are showing signs of stabilizing, though they’re not necessarily ready to take off just yet.So, what do all these contradictory messages mean for the average Canadian investor hoping to see some life pumped back into his or her portfolio? The short answer is investors have to be nimble and ready to pounce on the opportunities that present themselves . . . and be prepared to get out before the tides turn. Of course, this is a lot easier said than done, as it takes a great deal of insight into what distinguishes a potential winning opportunity from a dog that’s about to roll over and play dead.

    To gain some perspective on whether it even makes sense to be in the equity markets, which I believe has long been in the throes of a secular bear condition, it’s helpful to look back on the makeup of past secular bear markets for some historical guidance. The media often talk about the economy and the investment market as though they’re one and the same, but the fact is they’re two very distinct beasts. History clearly shows equity markets can fall precipitously despite the economy being fine (to wit, August to October 1987) and sometimes the markets rise like a phoenix in the midst of economic turmoil (2009 was an excellent example).

    Since 1900, there have been three U.S. secular bear markets in which owning stocks proved to be unprofitable for lengthy periods of time. If you accept that the bull market that began in 1982 ended in 2000, we are now in the tenth year of our own secular bear market. Based on the average span of almost 15 years for the three previous secular bear markets, we likely have a fair bit more bear time to go. In fact, as of the end of August 2010, the ten-year period provided nominal returns of negative 1.1% per year.

    This, of course, is where many people – particularly investment advisors with a vested interest in seeing their clients keep their money exactly where it is – will pipe up and say, “Hey, what about the great market rally of 2009?” To put it bluntly, that ain’t nuthin’ new. Just like in past bear cycles, including the one that started with the Crash of 1929, the market doesn’t follow a straight line down. There’ll be inevitable interim periods where the market rises strongly, but the effect is fleeting.

    What’s an investor to do? Do you accept the one or two percent annual return you can always get in the fixed-income market, or do you take a deep breath, take a ride on the market-timing roller coaster and hope you come out ahead in the end?

    Our view is there actually is room for investors to earn healthy and sustainable profits in a volatile market. More so, in fact, than in a flat market – the real demon to investors. But first you need to discard the dogmatic notion that the market can’t be timed.

    The truth is, market volatility presents real investment opportunities for those looking for sizable returns. The trick is in figuring out where and when to put money in, and where and when to pull it out. This is obviously not for the faint of heart, the ill-informed or the poorly researched.

    There are a wide variety of effective tactics a sophisticated investor can employ to make and save serious money in a fluctuating market climate, from put and call options to hedging with futures or investing in long bonds and shorting the market. But in all cases, it makes the greatest sense for an investor to turn to a money manager who has experience in the use of these strategies and can employ proven risk-management techniques.

    It may not be possible to time the market with perfection, but any investor can be perfectly certain that if they don’t do something to more actively manage their portfolio, they’ll be looking at lame returns for some time to come.

  • Murray Belzberg is the president and founder of Perennial Asset Management, a Toronto-based investment management firm that takes an active core, style-agnostic approach to money management.
  • Murray Belzberg