Jim Wilson
March 15, 2023
2022 Review Letter
2022 was a challenging year for all investors, virtual every asset class had negative returns as the world adjusted to higher interest rates. We are pleased at how our portfolios performed as we did well against our benchmarks and more importantly avoided permanent losses of capital.
The fight against inflation caused Central banks to raise rates at a pace that was unprecedented, from 0% to well over 4%. And they continue to say that they are not done.
In hindsight, the conditions that led to inflation and higher rates seem obvious and it begs the question, how were so many in the financial industry ( including myself) so off base in terms of preparing for the resurgence of inflation? In truth, it was not so obvious.
After the financial crisis of 2008-2009, central banks cut rates to 0% and governments enacted numerous stimulus programs. Many people thought the combination of low interest rates, aggressive buying of debt instruments by central banks and fiscal stimulus plans would lead to inflation. Instead inflation rates stayed low and in some instances moved even lower. Predictions of rising inflation proved to be wrong for many years.
Therefore it was not surprising that many people expected the same result from the monetary and fiscal stimulus plans in 2020.
Many investors were disappointed by the negative returns incurred in both bond and equity markets in 2022. However, volatility is the price of admission to capital markets. In most years, a 10% intra-year decline in stock prices is normal and there are numerous instances where asset prices fall by 20% or more. Upside volatility is generally not a concern and is generally treated as a just reward for smart investing. Downside volatility is feared and causes many to think that somehow they were wrong in their investment choices and strategies. Nothing could be further from the truth, upside and downside volatility are normal, what investors should fear are markets that have no volatility.
Markets that only go up are not possible or desirable. Without volatility , there is no price discovery, no price to pay for being imprudent and certainly no price to pay for being over leveraged. Volatility is normal and shows that markets are indeed functioning as they should. In this light 2020 returns look abnormal.
Who expected asset prices to rise to record levels while the world was dealing with a once in a lifetime pandemic and the extreme financial shocks that came with it? Since there is no such thing as a free lunch 2022 looks like a year in which prices adjusted back to more normal and we hope sustainable levels.
One of our favorite financial commentators is Morgan Housel, author of the Psychology of Money. I paraphrase “optimism isn’t believing that nothing will go wrong, but the knowledge that things will go wrong, that life will be incredibly challenging but that humans will find a way to solve our problems. So far that has proven to be a good bet.”
Given the understanding that volatility is a necessary feature in markets what should investors strive for? Again we quote Morgan, he writes:
“More than I want big returns I want to be financially unbreakable, and if I’m unbreakable I actually think I will get the biggest returns because I will be able to stick around long enough for compounding to work it’s wonders. Compounding doesn’t rely on earning big returns. Merely good returns sustained, uninterrupted for the longest period of time, especially during periods of chaos and havoc will always win.”
We strive to build plans and strategies that will function when faced with reality and a future filled with uncertainty is everyone’s reality. Building in margins of safety so you can continue to live as you planned even during periods of heightened uncertainty is the most valuable part of any plan.
Housel writes:
“ we spend years trying to figure out how Buffett achieved his investment returns, how he found the best companies, the cheapest stocks, the best managers but equally important is pointing out what he didn’t do:
He didn’t get carried away with debt
He didn’t panic and sell during the 14 recessions he lived through
He didn’t sully his business reputation
He didn’t attach himself to one strategy ,one world view or one passing trend
He didn’t rely on other people’s money
He didn’t burn himself out or quit or retire
He survived, survival gave him longevity.”
We often get asked: “ how should we adjust our plans because of inflation?” In general the answer is to stick to the plans we already have in place. In the short term all asset prices are negatively affected by inflation and rising rates, but companies will always adjust and will raise prices. In the long run, the exact investments that you already own gives you the best chance of keeping up with inflation.
Notable changes to portfolio
Given the long term growth prospects for semiconductors we added exposure by buying ASML and Intel as well as a note linked to the the Vaneck semiconductor etf.
Click on the link below to learn more about semiconductor manufacturing and ASML’s role , it is beyond fascinating!
https://www.cnbc.com/2022/03/23/inside-asml-the-company-advanced-chipmakers-use-for-euv-lithography.html
The selloff in interest sensitive investments such as preferred shares gave us the opportunity to add exposure to the Canadian preferred share market at very interesting yields. The Canoe Preferred Share Portfolio is actively managed to produce high levels of tax efficient income and capital appreciation.
Added Edgepoint Monthly Income Portfolio to take advantage of opportunities in North American corporate bonds.
Exited Manulife Strategic income as we felt Edgepoint monthly income portfolio offered better risk reward and lower fees.
Rebalanced to ensure portfolios remain at optimal allocation
PS: We quoted Morgan Housel a few times. We highly recommend his book the Psychology of Money. It explores how our biases and experience will affect our attitude towards money and investing. It is a great read whether you are an experienced investor or an investing neophyte.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you.