As a preamble to this month’s post we think it is imperative for a couple of reasons to mention the attacks on Israel by the terrorist group Hamas and Israel’s recent response. First, there is the loss of innocent human life on all sides which is a terrible tragedy that should not be brushed aside, second is that this situation is complex and multi-layered due to a history that did not start in 1973, 1948, or even 1914, after World War I. There are roots to this conflict that can be traced back 3,000 years, making it pretty much impossible once the war ends to know what the ripple effects will be for generations to come in the Middle East and geopolitics in general. Our point is that human suffering like this is tragic, unnecessary and unfortunate, yet there are economic consequences that investors should pay attention to, and we offer a couple below.

The Recent Past Does Not Forecast the Near Future

Some of you may know, or have heard about, people from different generations exhibiting financial behaviour that gives you a strong clue as to what period of economic history they grew up in - for example, this is why seniors that grew up during the depression tend to live below their means and those born into prosperous economic times live large: Psychologically they let their past inform their vision of the future, although it’s been proven time and again that there’s no correlation.

With investing you don’t even need to look at generational divides to see how the past influences an investor’s view of the future, there is a temptation to look at returns in the very recent past and expect that returns in the near future will continue to be similar. This is psychological behaviour exhibited by humans known as recency bias, and it is a false premise. When it comes to investing the recent past does not forecast the near future, in fact it is often just the opposite.

The graph below shows the calendar year returns¹ for our Dividend Growth Strategy, which is a collection of 30 established North American companies that have a history of increasing dividends and profits. As an investor in this strategy you are a part owner of these businesses, and you effortlessly share in the profits and share price growth over time. What do we mean by effortlessly? All you do is nothing other than put money into it. In contrast to rental real estate, you do not need to collect rent, or fix the gutters and toilets, you must simply be patient, which is best accomplished and easier to do by having a long-term, balanced and steady perspective - much like a business owner.

 

 

We can tell you that because of the recency bias fallacy, our phone does not ring with clients calling to invest new money after below average performance years like 2016, 2018, or 2022. Yet it rings loudly and often after above average years like 2013, 2019, and 2021. The purpose of this blog post is to bring special attention to the fact that in 2022, and so far in 2023, the performance of this strategy has been less than its 10-year² average rate of return, notwithstanding the fact that historically it has created a great opportunity for long-term investors. Long-term average returns of 11.19%³ over the last decade are a function of below average and above average years, but it is critical to not mistake the recent past as a mirror for the long-term future. In fact, it can often turn out to be the opposite.

Randy and Ian

 

1. Source: AMA Program, Composite Performance Reporting

2. Return for 2023 is year-to-date, as of September 30, 2023

3. Gross of fees