As I sit and write this overview, it becomes more evident that the stock markets of the world are increasingly more correlated. With free trade agreements and the speed of technology, we cannot help but be a global-based economy. With the uncertainty and nervousness of the global-based investor, we are witnessing a sell-based market as fears of US debt ceilings and European Bank failures heighten.
In history, this is not the first time that fear has controlled short-term views on the market. I liken the market to a “voting machine” whereby investors with a lack of perfect information rely on one or two unconfirmed pieces of information to judge or vote on a particular stock.
When fear is paramount, the voting machine gathers negative overtures to cast a “sell” signal. This signal is based on emotion and not on the valuation of a company’s business model. The market in the short term will always be directed by the emotion of fear or greed and not on rational evaluations of a company’s going-concern value.
I can remember talking to Robert Krembil, founder and chief investment officer at Trimark Funds, at a farm auction at Epping about the state of the markets when the Nortel crisis was wiping out the market. He continued to state this is the time when your advisors are needed the most to deal with the emotion of investment losses.
This is where the best advisors and money managers rise to the top of their field, not by outguessing the market, but by staying true to their discipline and keeping focused on long-term fundamentals.
He continued to state this is the time when your advisors are needed the most to deal with the emotion of investment losses.
The current views of the market are drawing investor experience to recall the lows of 2008–2009 during the bank liquidity crisis. I have heard many comments from clients that I do not want to go back to 2008 again with my portfolio. Many investors are predicting a similar amount of pullback, and if you believe in the power of suggestion, you can actually establish a trend. This is what I believe to be the major contributor of the past few days.
Every company has a going-concern value based on the strength of its balance sheet, revenue lines and earnings. These are the basic fundamentals I use to put a price on a business to establish “What do I own,” “What do I owe” and “What do I make.” In 2008, the going-concern value was bruised with write-downs of bad loans from non-performing mortgages and commercial paper. This decreased the strength of our banks’ earnings and balance sheets and created a financial sell-off, pulling portfolio values to near half of the previous highs as the “going-concern value” was interrupted temporarily. The good story is the Cardinal holdings that experienced this pullback were invested in great businesses and the price rebounded to pull back our portfolios and reset new portfolio highs, even while the TSX index still remained 10% short of its all-time high.
The current market sell-off has no basis in “going-concern values” being lowered. On the contrary, we see earnings up year over year, balance sheets very strong and reoccurring revenue lines producing larger margins. The going-concern value should be significantly higher than the market is pricing at today. Stock prices will come to realize going-concern values. It may not adjust next week, as the power of suggestion is setting negative trends, but such trends cannot overpower the going-concern values.
Our Cardinal portfolios are fully positioned in Canadian industry leaders that have great business models that are market dominant within their competitive sectors and, most importantly, pay a profit-sharing cheque quarterly to us in the form of a dividend. Their going-concern value is much higher than the current prices suggested by the voting machine market of today.
I spoke with David Atkins yesterday, and he is not at all concerned about the current market valuations. He sees tremendous upside potential in every holding. They continue to focus on their strong discipline and are maintaining a strong buy/hold on equity investing. We talked about several of the individual positions and their business outlooks. The Cardinal portfolios are crowding a near 3.5% dividend yield in a time when 10-year government bonds are yielding just over 2%. This yield inversion is a current market event that has never occurred in any previous market. As investors seek yield, the strong dividend payers will be the priority of investors, and stock prices will build back toward going-concern values.
The market needs to establish periodic lows by which to produce enhanced recovery returns. The unfortunate part is that most investors pull out in markets of today and buy back in when headlines are robust. Fortunately, at RBA we have not yet had a single investor pull out. A wise professor once told me “Buy on bad news, sell on good news.” We have a lot of bad news, although, fortunately, it is not directly affecting going-concern values. I am very confident that the lows of 2009 are not retested in this cycle and that the rebound when it starts will occur quickly and establish new market highs in North America that are fully supported by the business models. Let the market be afraid, while you are smart.
Todd Campbell
President, RBA
President, RBA
