“Cleaning Up”

There has been a lot of concern about the rapidly falling oil prices and what that means both for energy stocks as well as the Canadian and global economies. We’ve been following this and hearing a lot of conference calls and reading analyst reports on the topic. As you can imagine, there is a lot of noise about this right now – and the short answer is that no one knows.

While that may be disconcerting, it is indeed most often the case anyway – so, from my perspective, this is nothing new. We continue to watch the situation closely to see what we can glean from it.

In any event, it has always been my bias to not own more than a token weighting in the energy sector. We like businesses that have high degrees of predictability. Anything connected with a commodity, almost by definition, has no predictability. For example, 6 months from now, a barrel of oil could be $40 or $140. No one knows! And that’s a lousy business.

Banks, by comparison, will undoubtedly continue to be the greatest fee generating machines the universe has ever created. The Canadian banks reported their results this month and they continue to set records, even in a historically low interest rate environment. Bank of Montreal, for example, made $12 million profit per day last year, including Sundays when they are closed! Yet, try and find a pen at the teller station. Actually, try and find a teller now… but I digress. The point is, banks generate remarkably stable and robust profits – and yet they all sold off as they didn’t make quite as must as “The Street” had hoped in the 3rd quarter of 2014.

It’s funny – my decision to not have any significant weighting in energy stocks is not something we’ve generally talked about. Managing for risk, as we do, is not a huge selling feature when people are normally hunting for returns. From my perspective, it’s like a car company bragging that they have better air bags than the next guy. It doesn’t really matter until you need them. We’re happy to report now that our portfolios are doing considerably better than most, precisely because we managed for risk.

Where we do see considerable opportunity is in all of the beneficiaries of lower oil and gas prices — the consumer. The sudden drop in the price of gas at the pump is an immediate and significant savings for all consumers! It’s like a massive tax cut. It comes at a very good time, as people are spending and travelling a lot over the holidays. This impact will primarily be felt in the US – which is great for most clients, as we have purposefully overweighted US and global companies in most portfolios. As I suspect this trend will continue, we’ll be tilting our sails more in this direction.

We will also continue on the path of reducing stock specific risk in most portfolios. Buying single securities is a bit 1970’s now, as we have so many effective tools (ETF’s and well selected mutual funds, for example) that allow us to manage risk and access new opportunities with great speed and efficiency. I’ve seen so many cases of an investor getting the idea right – and the stock wrong. Just consider how you could be right in identifying smartphones as a great investment, and then buying Blackberry instead of Apple. Better to have bought several of them and getting it mostly right than trying to pick the winner and getting it completely wrong.

In any case, we continue to do our due diligence and “vacuum” behind the scenes!

Leave a Reply

Your email address will not be published. Required fields are marked *