2008 – A Year in Review

There is no doubt that 2008 will be remembered as
one of the most remarkable years in the history of
the global stock market (and not in a good way).
Events have occurred that almost nobody could
have predicted, although many seem obvious in
hindsight. However, we must move forward.We
can’t dwell in the past — we have to learn from it. So
what can we find out from the previous downturns? Let’s take a look.

1987 Black Monday — It was the largest one-day
market decline in history. The general reaction by
investors was mass capitulation and a huge dumping
of stocks, good and bad. The panic crystallized losses,
and many investors went to cash to avoid further
trouncing — not a wise move for long-term investors.
The markets recovered, but many investors were
not able to participate in the upturn because they
had sold out and were waiting for “just the right
moment” to get back into the market.

1990-91 recessions – Companies were laying off
staff by the thousands (just as at present). They
restructured, cut costs, merged with competitors,
and did all the things they should have done in the
good times, but didn’t because times were good.
Investors, scared by the glum news, continued to
wait on the sidelines. Unfortunately for them, all this
cost cutting and restructuring led to companies making unprecedented profits and therefore
optimum stock market performance for the next 10
years (with a few bumps along the way).

2000 – Everything was great, especially in the fancy
new technology companies. Most people felt that
the old way of doing business was out and that if it
was on the Internet, it would lead to profits.
Unfortunately, what really went out the door was
people’s ability to use common sense and
calculators. We all know the result of overbuying in a
particular sector — a big drop! This plunge frightened
perfectly reasonable investors out of the market
once more and out of good companies. Again they
waited on the sidelines until the markets were high
and again moved back to risky investments.

2008 and today –What we are really seeing is a
reminder of just how much capitalism is dependent
on confidence. What we are experiencing in the
stock markets is a lack of confidence, but what we
are certainly not seeing is a lack of good investment
opportunities. This is not a crisis of business
fundamentals (most, but not all, businesses are still
very strong), but a crisis of confidence in investing in
the future.

Without confidence, the price of any asset (stocks,
bonds, commodities, real estate, and even your car)
becomes separated from its true value. If investors
lose faith and trust in the process, asset prices
become disconnected from expectations of future
earnings and profits and are left to nightmarish
emotional scenarios. When this happens, a
fundamentally good investment can appear to be worthless overnight simply because nobody will
buy it, as they are convinced that the prices will
fall further. Rather than making careful
assessments of future earnings and risk versus
reward, potential buyers prefer to wait until sanity
returns. Of course, all this waiting and lack of
purchasers pushes prices down further, increasing
the downward spiral.

But we believe in Darwin economics, which states
that good businesses adapt based on changing
circumstances. As we head into 2009, prudent
business managers know that times will get tough
over the year. And, as a result, they will do as they
do in every recession — cut costs, restructure,
announce lay-offs, buy up competitors at
reasonable prices, and all the other things they
neglected when times were good. This inevitably
leads to higher profits and stock growth (we just
don’t know when).

True investors learn early in the game to accept
what they cannot control: the stock market, the
bond market, and the economy — almost
everything. However, we do have control over our
responses to information and our future actions.
We recognize that there is no ideal investment
strategy; it is bound to be imperfect at times.
There are always variables and unknowns beyond
our control. Successful investing takes time,
flexibility, patience, and, most importantly, the will
to hold your ground when everyone around you
is panicking. The right investment move can often
feel wrong at the ideal time.

A strong case can be made that the pendulum
has swung to the point of excess gloom. As a wise
investor we know once declared “There has
always been good news and bad news out there.
Only two things vary at any given point in time: first,
the balance between good and bad news and
second, what people focus on.” The tech mania of 1998 to 2000 was a classic period in which
investors concentrated on the good news and
ignored the bad; now we’re seeing the opposite,
as people talk about only the negative, neglecting
anything remotely positive.

Here are some positives as we look
out into 2009:

• Companies’ valuations are low, which means
they are cheap compared to their revenues.

• Oil prices are lower,which is good for everyone
but oil companies and the Canadian dollar.

• Banks are becoming more prudent and
stricter in their lending practices — no more
subprime loans (for now).

• Bad investment lending companies have been
removed; for example, Lehman Brothers, Bear
Stearns.

• There is a global political effort to solve this
mess, the likes of which have never been seen
before.

• Lower interest rates should (eventually) mean
more liquidity.

• Strong companies will show increases in
dividends.

• The new U.S. government as well as other
governments want to expand jobs and
infrastructure spending.

• Most importantly, we realize that downturns
don’t last forever — we just don’t know when
they will end.What we do know is that we
would rather be in the market when it turns
than sitting on the sidelines waiting for that
magic moment to get back in.

We would like to take this opportunity to thank
our clients who have stuck by us during these
difficult times. It has been a trying period, but we
will continue to make sure you are kept up to
date and help you through this market. If there is
anything that you need, please know that we are
always here for you.

Happy New Year!

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If you would like to take this opportunity to review your portfolio, please
contact
your closest CARP Certified Advisor.

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