Rational Advisor

Okay, this is my notes from todays meeting with myself. Yep, I know its nuts, but I do a sanity check every Monday, to see if I’ve turned Wacko!

Issues

- Currency, has been the main issue for Canadian outperfromance, and it’s not just against the US dollar, it’s against all Non-Oil producing countries. It’s really the story of Oil.
- All Banks have now come in and said that they expect the Canadian dollar to trade between 93c and 95c next year. Much of this beliefe is due to a slowdown in Canada, and a lowering in the Price of Oil.

Risks

- Oil (There is lots of supply on the horizon, 3 wells in Saudia Arabia alone)
- US Elections (Nov 08), a change in regime means a change in focus. What needs to be considered is who is backing up Clinton, we know it is NOT the Oil Companies.
- Emerging Markets (China and India) - these countries have high P/Es. This is most likely the next bubble, don’t know when it will pop, but it will, just like Japan, technology etc.
- Small Caps are now lagging Large Cap companies. THis means that people are being concerned about the risks in small caps.
- OCtober is a volatile month, f the ten largest stock market drops, 4 of them were in October.
- 3Q Earning season will be weaker - reasoning, financials affected by credit crunch in the summer.

Good Things

- US debt is lower, thanks to a low US dollar - no recession likely, just a mild slowdown.
- We have been rebalancing our portfolios to weaker areas like the US. As the Canadian currency and Canada has appreciated we hhave taken the gains and purchased more US large cap companies.
- We hold more LArge Caps than Small Caps. This will benefit us, because LArge Caps offer more protection in times of turmil
- Move to Safety.

What has been working in the financial industry recently.

- Funds with higher weightings in Canada and Oil have done well - I think this is beyond reason. Copme on, is Canada really a global economy, let me see, most of our companies are being bought out by bigger foreign companies for cheap.. Our manufacturing sector is having a real tough time, the latest employment figures show us that its government jobs that are being created.
- For the last couple of years Growth equities have outperfromed value equities - we hold both, but it is our value and especially the non-canadian values that are impacting us. The growth equities are doing more than well - Proctor and Gamble, Google, etc
- Funds that are invested in Emerging markets have done well. We do not believe in these areas. This remids me very much of the technology era, when people were coming up to me and saying why don’t you do technologies, they have done well for four years, everybody needs it, Well, I am hearing the same about China, India and emerging markets. I prefer to remain cautious, and do not beleive in this bubble like state. Just because the rest of the world believes it is good does not make it good.
- Lower bond weightings, as things were going gung ho in the equity markets, investors have shifted out of safe bonds and into riskier equities - this will eventually collpase and the safety of bonds will return to their norm.
-I do not believe that any of this is sustainable.

I think we have the most rational mix.

What is hurting is our non-Canadian content - and that’s okay, because Canada as an OIl based country cannot appreciate continually at this ace. Too many people are thinking that this can go on forever, its the same story as technology in 2000, only now its energy and emerging markets.

What is hurting is our lower weighting to Emerging markets such as India and China. Sorry, but I just can’t trust the financial accounting standards there. Also since AUgust 20th the CHinese have allowed more retail investors to purchase their shares through the Hong Kong Exchange, so more Hedge funds and fund managers have increased their allocations to China. This is classical crowd theory, when everyone runs that way, then watch out!

What’s hurt us is our Value managers. Growth, becasue of its higher weighting to Oil has done well. We know that when their is an eventual correction. It is to the areas of value that investors will run.

We are no taken in by all the BS that a lot of investment companies, fund companies and media are spouting - “China, India, Canada - this is a “new” world - take the rIsks you will regret not getting on the bandwagon”. I keep on going back to all of the down markets in my experience, and recall a similair conversation, around a different story, Technology (2000) , Asian markets (1998), Latin America (1997), Oil (1991), Japan (1991), Canadian House prices (1990), stock options trading (1987)….

The wisest move was to stay away from all the gibberish and not get caught up in the stories. It may look stupd in the short term, and it may look like you are not doing the right thing and giving up good returns, but it is the sanest thing.

Courage, discipline are essential, otherwise the business cycle will be your enemy instead of your ally

Thanks for tolerating me

Rational
Been there - done that

Doug and Bill went out drinking one night and didn’t get home till the wee hours.

They see each other the next day at work and Bill asks, “Did your wife have much to say when you got home last night?”

Doug replies, “No, but that didn’t keep her from talking for two hours.”

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