|
Success is a lousy
teacher.
It seduces smart people into thinking
they can’t lose.
Bill Gates |
The TSX index is up more than 20
1/2% over the first 9 months of 2005. Admittedly, that’s pretty good.
However, with the oil and gas component “on fire”, thanks to $65
barrel oil and $14 a BTU natural gas, it is not surprising that this
sector has turbo-powered the TSX benchmark and masked the overall
market mediocrity.
Comprising 27% of the TSX index,
oil and gas is emitting a sense of déjà vu to numerous market
observers – back to the peaky high tech mania of 1999-2000. At that
time, one stock, Nortel, at its all time high price of $124.50,
comprised over 35% of the TSE 300. Furthermore, with many oil and gas
companies doubling and tripling in price over the past 6-12 months,
the market is providing an inflated sense of success and is instilling
surging bravado in many neophyte investors. In addition, the wild
success of income/royalty trusts, too, has added to investors’ extreme
optimism and propensity for risk. Overall, it appears too easy.
Now, this is not to say that we are
negative on North American common stock prices. In fact, on the
contrary, we remain quite optimistic. This is in spite of $65 oil, $14
natural gas, U.S. twin deficits, hurricanes, Iraq and Middle East
tensions, etc. We believe that North American economic growth for the
next 12-18 months should trend toward 2 1/2% - 3 1/2 %, although,
inflation could increase from the recent 2% - 3% toward 4% - 5%. So,
what does this all mean for common stock prices?
While we believe that common stock prices will trend higher over the
next year, it is our view that prices will be fraught with extreme
volatility and will test investor conviction. It is our opinion that
now is the time to become more prudent, more cautious. True, oil and
gas shares have done rather well and such ABC Fund holdings including
Nexen and Talisman have both tripled over the past 12 months. We must
not, however, be seduced into thinking that one cannot lose with oil
and gas. In consequence, we have been taking profits while, at the
same time have attempted to maintain equity exposure by switching to
relatively cheaper stocks. In addition we have become increasingly
judicious in ferreting out the dirt cheap stocks and liquidating the
overpriced ones.
We believe that the key investment
decision is no longer when to buy; rather, it is when to sell. In many
cases we will have to grit our teeth, maintain our disciplines, focus
and commitment to sell overextended and fundamentally overvalued
stocks. But this is not an easy task. It combines courage of one’s
convictions and extreme stamina. In summation, we will gravitate
toward other relatively cheap stocks or to treasury bills until we can
redeploy our cash reserves into new attractively-priced securities.
