Here we will discuss why there is always a potential opportunity cost when investing in Government of Canada Treasury bills (T-bills) or bank sponsored Guaranteed Investment Certificates (GICs).
In this year-end letter, we wish to extend a particular thank you to all our clients. The close of calendar year 2023 marks the 20th anniversary of the founding of Avenue Investment Management.
There are many strategies for investing in financial markets but at the core most revolve around two basic principles. The first group we can generally describe as “do what everyone else is doing”, which is called momentum investing. The second, which we believe to be a more thoughtful approach, is to constantly seek out businesses where value is not being recognized by the stock market. This is broadly referred to as stock picking.
While we have confidence that over time our investments in high quality businesses will appreciate in price, there are also going to be periods when prices are weak. And it is in weak markets where we find opportunities and build the portfolio for future returns.
Most of the headline news has focused on central banks raising short term interest rates to combat inflation. Higher interest rates will restrict businesses and consumers alike and we will experience a recession.
We would like to start this quarterly letter by acknowledging that we are in an extraordinary period of financial change and extremes. What has not changed is Avenue’s strategy which we call quality investing, and we believe it is more relevant than ever. Our strategy is designed to be a universal approach to get us through both good and bad stock markets. The first principle is to identify what are the best stand-alone compounding businesses throughout the stock market. Second, we do our best to be patient and invest when these businesses are trading at a fair price.
At Avenue, we are staying calm and analytical and working hard to make sure we can stay invested while avoiding areas where profit margins might be under pressure. As the economic landscape shifts, there are many new opportunities as other investors pull back.
At Avenue we believe we have entered into a period of scarcity like we have not experienced for some time. We face scarcity of capital, energy, food and labour. While this will be a challenge for all investors, we believe there is an opportunity to invest in what we think of as resilient quality businesses that can take advantage of scarce resources while also avoiding businesses where profits may decline.
The saying, ‘stay the course’ has a long military history but it is Ronald Reagan who repurposed ‘stay the course’ as a catch phrase for resetting the economy post 1970s inflation. At Avenue, we have a strategy that incorporates bad markets as well as good and we plan to come through this current weak period stronger than when we started.
We will get through this financial market weakness remembering that the last few years have been a positive environment for investors. But right now, it seems like all prices need to find a new level. While we anticipated that 2022 would be a year of financial market headwinds, investors are faced with almost too many problems all at the same time.
The words ‘this time is different’ are often referred to as the four most fatal words in investing. What seems new and fresh may lead many to conclude that different rules should apply.
“The key is not to predict the future but to prepare for it.”
– Pericles, 494 to 429 BC, Athens
This famous quote from Pericles was made in the context of readying the Athenian people for the unpredictability of war. During the last two months we are witnessing what seems like a throwback to a past where despots were intent on brutal conquest. This behaviour seems completely irrational within our globally integrated world of business and finance.
Our financial savings are one of our most prized possessions. It represents all of the years of hard work we put in and our commitment to a secure financial future. It’s how we maintain our desired lifestyle and the means to which we can take care of ourselves and our families.
The historical example of a mania that is often sited is the Dutch tulip bulb frenzy of the 1630s. The tulip craze became popularized as a cautionary tale for investors in the 1841 book by Charles Mackay called Extraordinary Popular Delusions and the Madness of Crowds. Excessively easy monetary policy accompanied by a strong economy led to one of the oddest, speculative, price increases ever.
In our Q4 Letter, we will start by giving our view on how financial markets are interpreting the possibility that the Omicron variant will evolve to being endemic. This past year, 2021, was the second year where the virus drove central banks and governments to dramatically increase liquidity, resulting in consumer price inflation. We will discuss our view that regardless of inflation, longer term interest rates can only go up so much. The big theme for 2022 is the deceleration of liquidity as central banks tighten and governments no longer hand out cheques. Liquidity has been the main driver of the financial markets so pricing of all assets will be affected. This is why we have worked hard over the past quarter to build resiliency into Avenue’s equity portfolio.
In our last podcast of 2021, Paul Gardner and Matt Manara give a recap of the year in the bond market and discuss why despite low interest rates bonds can still be an important investment for investors.
China’s economy appears to be slowing. This is a big deal in itself but how will we be affected as Canadian investors? Our honest answer is we don’t know, but we should be thinking about it. China is now of a size where it has a major impact on the global economy and financial markets.
We will start this quarter’s letter with our view on how the lingering pandemic is having a significant effect on the operations of all corporations. The economy and the stock market are changing at a fast pace, and we have seen our equity portfolio turnover increase this year. As well, we have made an incremental shift back to Canadian companies for the time being because we are finding better opportunities here. We will also discuss the bond portfolio and how we have protected it against the uptick in Consumer Price Inflation (CPI).
It may or may not surprise you to know that 20% of all US dollars in existence, all time, were printed last year. Amidst a global pandemic, monetary and fiscal policymakers worldwide were hitting the gas pedal. With that, one worry has crept back into our vocabulary lately after years of being a tailwind – inflation.
In this quarter’s podcast, Bill Harris and Bryden Teich discuss the inflation debate and whether or not the inflation we have seen thus far in 2021 is likely to persist.
In this quarterly letter we would first like to discuss Avenue’s view of inflation, which has quickly become the main topic for investors. Leading from our view on inflation is our broader thinking about how nothing is normal in our current financial world. But we believe we need to get used to it; we are living in a new normal. Our conclusion continues to be that we have to stay invested, but more than ever it matters what we own and it certainly will always matter how much we pay for our investments. Lastly, we would like to give an update on the Avenue Tail Hedge portfolio now that we have been incorporating this strategy for a full year.
In the latest Avenue podcast Bill Harris and Bryden Teich provide a summary of the first quarter of 2021 and highlight some important take-a-ways from the most recent Avenue quarterly letter.
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