Day of the Dead...Investor
Written by Paul Siluch
November 1st, 2023
Since Hallowe’en is a celebration of the dead, let’s have a look at dead investors. What? As it turns out, they are actually surprisingly good investors. A survey years ago by Fidelity supposedly scanned all their accounts to find who were the best investors. The result was rather surprising: the best investors were dead!
We know trading too much is costly – those traders with the highest frequency experience the worst returns. But this survey seemed to show that the other end of the trading spectrum was even more true: those with NO frequency did the best. They didn’t panic (hard to in a coffin), and they didn’t get greedy (even harder). Despite crashes and booms, they hung on.
Over long periods of time, the long-term direction of stocks has been up:
"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
- Warren Buffett
There are companies devoted to finding the beneficiaries of these long-dead accounts. One of our clients was the beneficiary of a relative who left an account in Florida then died in the Caribbean in the 1960s with no heirs. He had stocks that went to zero, but one telephone stock became worth millions. That’s the other benefit of being a dead investor: you never sell your winners too soon.
The U.S. broker was only to keep charging management fees for close to 30 years! The perfect client: no complaints. We are required to update accounts annually today, just so you know.
So how do we get ahead like the dead and ignore doom from the tomb?
The dead have the advantage of not caring much about their wealth. We, the living, most certainly have to. I have concerns about the world right now but know from years of watching the world that caution is always better than panic.
“Disasters have a way of not happening.”
- Byron Wien
I am also content to sit with big companies as they pay their dividends. Yes, recession is likely in 2024. We may already be in one - Canada’s economy shrank from April through June and appears to have also contracted from July to September.
Recessions can be good for big companies – especially big monopoly companies.
Think of Canada’s banks for a moment. In the last year, HSBC (Hong Kong Bank of Canada) and Laurentian Bank both put themselves up for sale. These were two of the most aggressive companies in offering lower mortgages and higher deposit rates. This means two fewer competitors for the Big Six banks. In the U.S., two large banks vanished in March.
Similarly, Shaw Cable is gone in Canada, which shrinks the competition and empowers the remaining three telecom companies. Globally, Exxon and Chevron just made massive energy acquisitions leaving fewer to compete with them.
Weak markets made the strong stronger. It just takes time.
“The big money is not in the buying or selling, but in the waiting.”
- Charlie Munger
A World on Fire
Do you feel more stressed about the world today? It is hard not to. Markets have fallen 10% since August.
In 2022, there were 55 active conflicts around the world, which was up from 33 in 2012 (source: Peace Research Institute Oslo). One quarter of the world’s population - two billion people - live in conflict-affected areas. 2022 was the highest level of conflicts since WW II and that was before the 2023 coups in Africa and war in the Middle East.
So yes, it does feel like the world is on fire. This means more nervous moves in the stock market – both up and down – and a sense of less safety. Both as investors and as travelers. Places like the Middle East, Russia, Ukraine, and central Africa have become impossible to visit, and even China and India are difficult for tourists now.
Shortages
The metal cobalt is extremely hard, doesn’t react with water, and has a very high melting point. It is also blue and so used as a colouring in glass and enamel.
Cobalt is known as the Goblin Metal because of its colour, which is appropriate for this Hallowe’en week.
Cobalt was not important until World War II made it a key commodity. As fighter airplanes became faster and nimbler, their engines were subjected to terrific stresses as they dove and evaded one another. Piston engines ran extremely hot and often burned out their cylinders within 50 hours or less. That could be less than a week of intense flying. This forced tremendous advances in metallurgy to make the cylinders harder and more heat resistant. A mixture of cobalt-nickel-chromium was discovered as the perfect surface material for pistons and their cylinders, which then allowed hundreds of hours of flight time at high heat.
This was unfortunate for Germany. The country lost its edge in fighter planes when the Allies took French Algeria in late 1942. Algeria was Germany’s source of cobalt, and the lack of it hobbled their planes for the rest of the war.
Times of strife are often accompanied by shortages.
- Strife causes shortages.
- Shortages cause strife.
A shortage of capital means it is harder to finance production. Shortages of labour make crops more expensive to harvest. And shortage of access – through civil wars and border disputes – make commodities more expensive. Cobalt experienced this in 1942, and we are seeing it today in oil, uranium, cocoa, orange juice, beef, and chicken prices. Just to name a few.
Hallowe’en candy is 13% more expensive than a year ago (source: Datasembly). Blame hot weather in Mexico for decreased sugar crops, and heavy rain in West Africa hitting cocoa prices. Cocoa is the most expensive it has been since the 1970s.
Just this week, a Canadian copper company was hit with the possibility of losing its largest mine. First Quantum Minerals spent $6.8 billion to build the Cobre Panama mine in Panama that employs 40,000 people. Environmentalists and local activists want the mine to pay far higher taxes or be shut down altogether. The shares were cut in half in a couple of weeks. This could remove 1.5% of the world’s copper supply.
Meanwhile, we need to electrify the world far more to accommodate all the new electric cars, solar panels, and wind turbines. All of these need copper. The red metal is already in shortage, and this will only make it worse.
During the 1930s and 1970s - similar periods of shortage for commodities – hard assets were some of the best investments. But, they are volatile and can swing wildly. All the gains for a year can come in a single month. Our own investments in energy this year have been good, while fertilizer has been poor. In truth, we prefer steady companies that use commodities to make things rather than companies that produce commodities. The shortages building up today, though, make this a much tougher game.
Investable Actions
Continue buying 1-year GICs with rates this high (5.5% and better). Consider extending to two-year terms because Canada’s bank rate has been paused for four months now. Recessions usually see rates drop. Lock in.
Non-registered accounts can also consider bonds trading at a discount to their maturity values. This small discount is more lightly taxed as a capital gain and turns a 5% annual yield to above 6% for those paying higher taxes.
The “indispensables” – utilities, groceries, telecoms, consumer staples (Pepsi, Coke) that we need no matter what - look like they have stopped falling. They are usually the first to rise as recession hits and interest rates drop. They can all be added here.
