I hope our September newsletter finds you well.
Cheering for the Blue Jays has been a excellent band wagon for my family to
jump on. Being one man with three (wonderful) women has its challenges, but at
least they all like sports. Our evening conversations now involve ERA's,
Games Back, and the expanded September roster!!
August was very unpleasant for our portfolios and
reversed the gains we saw in July. Our more aggressive portfolios had larger
losses compared to our conservative portfolios, which would be expected in a
broad market correction. Canada continues to lag behind the rest of the
world. The TSX(Canada) has a net negativer return for the year of -3.5%.
The S&P500(USA) is now up 10.3% while Europe has a gain of 14.2% this
year. Overtaking Europe now is Japan, with a gain in their stock market
of 23.52% so far this year. These returns are all expressed in Canadian
dollars and therefore include our gains from a declining Canadian Dollar.
As of the end of August our 12 month rate of return on all our portfolios
is now close to long term averages. (source:Fidelity Investments:Datastream)
We made our way through the last few years with
many more strong months than weak ones. This current correction should not be
viewed as the end of the world. The funds that we invest in and the businesses
that they own are, on a whole, very healthy.
An Irrelevant Number:
The current drop in markets is frustrating to be
sure. No one could be happy about having some of our hard earned gains clawed
back.
However, be careful when listening to the news. We
must remember that the news is one form of entertainment. If the news show does
not create tension or fear in the viewer you will simply change channels and
advertising revenue will be lost.
So, how does the news create tension or fear when
factually reporting on something as straight forward as the stock market?
Simple, they use a true, but irrelevant number.
Stock market moves are always quoted in
"points" on the news. Hypothetically they would say, "the
TSX fell 100 points today, or "the TSX had its biggest one day point drop
of 200 points since...."
On the surface the facts are true, and can sound
fairly shocking.
For simple short hand terms the total value of the
stock market has been converted to "points" for decades. This method
was supposed to provide people with a number they could get their head around.
The Canadian stock market as a whole is valued at more than $2.575
Trillion. That is a hard number to picture.
The problem is that "points" do not
adjust for inflation. So comparing "points" from 1970, 1985, and 2015
is irrelevant. The graph below is LOGARITHMIC, which is the fairest way of
graphing the market to remove the distortion of inflation. Notice the first
major bar covers 500 points and the last major bar covers 8000 points. This way
(for example) a 2% drop would show an equal move in the 1960's and in 2012.
The news does not make this kind of adjustment. As you can see from the
graph, the rising and falling of the TSX is nothing new and certainly should
not be interpreted as anything other than a normal correction.
The news outlets know this full well and they know
that telling you that the "the TSX fell by .25% today" would be
pretty boring.
Warren
Graph from: Wikipedia