What should you do while markets are unsavoury?

Benj Gallander, Ben Stadelmann, and Philip MacKellar
July 19, 2022

All right, the questions keep coming in and a big one is: What are you Contra Guys doing now? You must be super active since markets have been thrashed.

“Um, yes and no,” we respond. Benj is mostly sitting on his hands and doing research, while Ben is being more active buying.

First, let us set the stage. Ben and Benj agree on tons of stuff, but where we are at in the cycle today leaves us with different viewpoints. Yes, markets have been hit, but compared with long-term historic averages, they remain at elevated levels – read “expensive” from Benj’s angle and he feels that a recession is in the short-term cards.

He suggests that this will occur this year or early in 2023. The interest rate increases sucking up money and people being “poorer” with the real estate price drop and their portfolio decreases are a few reasons. Ben, on the other hand, is far less confident in a downturn, citing pent-up demand as people have lots of money to spend, the low unemployment rate, and resource companies doing very well. No, we do not always agree.

While being definitive about this is of course impossible, several predictions that Benj put into the world via his Twitter account (@BenjContra) have come to pass.

It appeared very clear to him as 2021 turned to 2022 that lofty inflation was in the wind. One only had to go to the grocery store to see that prices were up fairly dramatically, with fewer bargains – and those that were on offer were not close to normal sale prices. And it was not just at the supermarket: Gas, restaurant meals and big-ticket items like new and used cars were becoming more expensive. When listening to politicians and those in charge of the banks denying increased inflation in Canada and the United States, the question was, “Do these people do their own shopping?” If they did, it should have been obvious that the price uptrend was far higher than they were letting on.

Another prediction from Benj was that the price of oil would go below US$100 a barrel. (At US$120, many others thought it would only go higher.) If one believed that a slowdown was in the wind, a drop in the price of this commodity seemed inevitable. It has recently cruised below US$100, and it would not surprise Benj to see it drop further. Below US$80 seems a very realistic possibility.

One of the major issues that has generated today’s problems is that governments overreacted to the pandemic. Both the Canadian and U.S. governments threw a ton of money at the crisis hoping it would stick, and to a degree, it has. The difficulty with this approach is that the sums were truly massive, the spending was not targeted enough, and it caused both countries’ debts and deficits to spiral further out of control. At some point the piper will need to be paid unless the monetary printing machines continue to spin crazily. And of course, this has accelerated the inflationary condition and the powers that be should have seen this coming.

Ramping up is relatively easy. Cutting back is much more difficult, especially if one wants to do it without causing great pain to the public. And while maintaining the backing of voters to be re-elected.

Let us look at how Benj attempted to set up his portfolio to deal with the unsavoury times. He has been buying little, and opportunistically selling, meaning there is less invested in the stock market, thus lowering risk. While the absolute return, either positive or negative would be a similar percentage, it would be on less money. As mentioned, he has been spending lots of time doing research. Meanwhile, Ben has been far more active in the stock market, certainly less fearful of the near-term future.

Some pundits, especially those seeking your business, will market their services today by saying things like, “Where should you invest now to beat inflation?” From our view, risk and reward parameters have not really changed, therefore assuming greater risks to beat inflation is a fool’s game.

One thing that has not changed is that dividends are good. As Benj likes to say, “Dividends allow me to be stupid longer” as collecting those payouts are indeed a happy occurrence.

Some of those continue to flow our way from our decision to buy preferred shares when many of them turned ugly a couple of years ago. The key to investing then was to buy into an arena that was beaten down, seemingly illogically. We piled into some of the prefs from stalwarts Brookfield Asset Management Inc., Manulife Financial Corp.m and TransAlta Corp. They all seemed incredibly cheap if the companies survived. Odds were they all would, with an upside of better than 100 per cent in all of these cases. It appeared that Mr. Market had simply become overly depressed. Since the purchases, they have gone up handily in value, while paying sexy payouts. Even today, investors who are looking for reasonably safe places to park their money with capital appreciation potential of between 60 per cent and 100 per cent or so – and dividends to boot – might want to take a gander at these enterprises.

Meanwhile, try to get a guaranteed return from our seasonal weather. From this angle, it does not last long enough, and we would prefer to stay home rather than heading to airports and dealing with all the flight hassles. That is as unsavoury as the limp stock markets.