February, 2000? The stock market was at record high levels. A single
share of Nortel was changing hands for more than $100 a pop. Dot com
billionaires were being minted. Usually sane companies were paying tens
of millions of dollars for web sites that didn't make any money. It
was, as we know today, almost the frothiest moment of the technology
I clearly remember the words of my own
investment advisor when we were musing on the market. "This," he said,
"is going to end badly." And it did.
that month Canadian investors poured $7.8 billion in net sales into
mutual funds, for one of the better months the industry had ever
experienced. A substantial amount of that money would end up being lost
as the bubble inevitably burst.
now to February 2002. The stock market is robust, but still well below
2000 levels. A share in Nortel is struggling to remain in the $8 range,
having lost close to 90% of its value. The dot com business is in
tatters, and some companies that seemed so smart as they "converged"
now look like they were run by myopic idiots. Interest rates have
collapsed to generational lows and scads of companies have seen their
market values take a dive.
And in that month
investors invested just over $4 billion in mutual funds, or half of
what went in two years ago and 15% less than the previous February. In
summary, we did it again - bought high, and sold low.
this is a loser's strategy. This RRSP season just past constituted a
major opportunity for investors to get their mitts on good assets at
fair prices in the context of a rapidly improving economy. Every major
indicator - employment levels, inflation, manufacturing activity,
consumer confidence - is flashing green at the moment. Economists are
united in their belief that we will have annual growth levels of 4% or
even 5% by the autumn of this year. Stock markets have been
anticipating that, with the Dow charging above the 10,000 level after
tanking in the dark days following September 11.
good news, however, is that those people with the clarity to be fund
investors these days are realizing that staying in near-cash assets is
a mug's game. Interest rates may be rising, but they will still be near
rock-bottom levels for at least another year. As a consequence, money
market fund sales have collapsed from last year's levels by about 60% -
less than a billion in January and February, compared with $2.4 billion
in RRSP season, 2001.
A lot of new money is now
being diverted into Canadian, US and international stock funds, as well
as funds perceived to combine both growth and safety - like balanced
funds, dividend and income funds, bond funds and mortgage funds. Of
course the irony is that as low interest rates creep up, many of these
funds will move lower because higher rates mean bonds and mortgages
become less valuable. Another example of money moving without the value
In short, there are times to sell
and times to buy. The rearview mirror tells us that the first few
months of the new Millennium, when AOL and Time Warner were shocking
the world with clicks-buying-bricks, was a time to bail. I have no
doubt that two years from now we will all look back on 2002 as a
natural time to have been bulking up on growth assets like equity
funds. Or, in other words, investors who ponder what everyone else is
doing, and then do the opposite, are usually the wisest among us.