Blue Period

Courtesy of Mertim Gokalp

With tax-loss selling behind us, it’s time to contemplate 2015 and what the markets may have in store. Pundits predict a generally robust year, albeit with increased volatility. Despite the blather about the market being rational, it’s as zany and fickle as the people who trade in it. How else to explain seasonal effects like the “Santa Claus Rally”, “January Effect”, and the fact that years ending in a “5” give positive stock markets? (The number 5 was certainly lucky for Coco Chanel who named her first perfume Chanel No. 5. Its financial success has made the brand the juggernaut it is today.)

Despite attempts to explain these effects as expressions of rational behavior, I think it’s best not to overwork the dough, so to speak. Is the January Effect, when stock indices get a bump, the result of investors buying back stocks after December’s tax-loss selling?  I say, when Nature gives you a boon, just say ‘thank you’ and shuffle off before She changes her mind.

Pablo Picasso said, “If I don’t have red, I use blue.” This is great investment advice.

The latter half of the year saw a lot red. When the price of West Texas Intermediate dropped through the floor, the share valuations of many senior, mid-, and junior-oil and gas companies went along for the ride. Of course, some are now in oversold territory and may attract investor interest next year. Others, particularly those with overly-leveraged balance sheets, high production costs, and unhedged contracts, will find the capital markets unobliging, forcing them to slash dividends, put themselves up for sale, or simply close shop. Until sentiment towards this sector changes, best to put down the red brush and pick up the blue.

In 2015, it’ll be blue skies over the country the world loves to hate, America. Lower fuel costs will be a boon for consumers— and Americans do love to spend their way to happiness. Hence small-and mid-cap companies that sell within the domestic economy like Coach, Nordstoms, Home Depot, and TJX Cos., as well as those who typically spend a significant chunk on transportation, like Fed Ex and Amazon, for example, are sure to see fatter margins in 2015 and beyond.

Another ‘blue’ area is luxury products. According to a recent special report in The Economist, shares of public luxury companies have outperformed those of other companies since 2005. Hermes, LVMH, Prada, Burberry, Swatch, Kering, Richemont, and Diageo are doing smashing business. Avid consumers in Asia are more than compensating for lower demand in Europe and North America. But don’t cry for Europe. Its luxury industry sold $726 billion of covetable mercy in 2013 and has 70% of global sales. So, while its citizens have cooled it on luxury spending, the continent is still running the show and reaping the rewards through employment, exports, and increased GDP.

Bernard Arnault, the sharp-eyed LVMH honcho was once asked by the late Steve Jobs for his advice on retailing. “I’m not sure we’re in the same business,” replied Arnault. I don’t know that we will still use Apple products in 25 years, but I am sure we will still be drinking Dom Perígnon.”

So, let’s raise a glass of Dom to next year’s most promising sectors: U.S.consumer goods companies, U.S. financial institutions (the regional ones too), small-and mid-cap U.S. domestic companies, and U.S. pharma and technology companies. Russia is a dud but India is looking interesting, and if monetary policy loosens up in Japan, that region may be worth a gander. Higher interest rates in the U.S. and, by extension, Canada, will put a damper on the allure of high-dividend paying stocks. But don’t be blue because steady growth in the U.S. economy will more than off-set this. And, for those going long, you could do worse than investing in luxury goods. No red ink in sight.

Here’s to good health and good fortune to all in the year that ends in “5”.

Candyland

Photo courtesy of Jason Meredith

The dress was pink chiffon. Cotton candy pink. It was strapless, with a fitted bodice, nipped in tight at the waist, and the skirt a big cloud of translucent chiffon. I simply had to have it and price was no object. That evening, I tried it on again in my bedroom. Under the overhead lights, I noticed that the pink was faded and yellowed in certain spots. Looking at myself in the full-length mirror I had to admit that the huge volume of chiffon made me look even shorter than I was. Suddenly I realized I had neither the shoes, handbag or jewelry to match the dress. It also occurred to me, I would never, ever in this lifetime be invited to a cotillion, which is the only kind of event at which a 16-year old girl could wear this froth. Plus, even if I were invited to one, I had no boyfriend to take me. Shit.

What I didn’t know then and sort of know now is, before you go chasing after the ‘wow’ pieces, build a solid wardrobe of boring but hardworking staples like the little black dress. Things that will actually benefit you in the here and now, not in some fashion fantasy life.

Same goes for investing. Many so-called investors chase after the latest thing that some pundit is touting in the press, instead of concentrating their efforts on building a set of core holdings and then, if the urge continues, venturing beyond for some badaboom action.

Since most of us, including the pros, are terrible stock pickers, studies show that owning a basket of well-diversified equities, either directly or through ETFs, mutual or pooled funds is, over the long term, the best strategy.

Staying fully invested, even through downturns, has proven to be successful too. A recent study by  Bernstein Global Research looked at 1,000, 12-month periods from 1926 until 2013. Those investors who put all their eggs in the market at one time averaged returns of 12.2 percent, whereas those who bought in gradually made 8.1 percent. The worst performers were those who stayed in cash on the sidelines. They netted 4.1 percent.

If I were building a core fashion wardrobe it would look like this: Marlowe cashmere v-neck sweaters in white, oatmeal, black; Gucci or Chanel wool gardardine slacks in black, grey; Chanel little black dress; Akris white shirts; Repetto loafers, Prada sport shoes; Max Mara camel hair coat; Hermes Evelyne or Jypsiere bag; Cartier Tank Francaise watch; Cartier Love bracelet; Tiffany diamond ear studs; Tiffany Elsa Peretti Diamonds-by-the Yard pendant. Done!

If I were building a core investment portfolio it would look like this: Pipelines (Transcanada, InterPipeline); Consumer (P&G, Unilever); Financials (Scotia, TD, RBC); Industrials (Deere, Fluor, Dupont); Technology (Microsoft, Apple, Intel); Pharmaceuticals (Pfizer, J&J, Merck)…you get the idea.

Yes, they are boring but they spit out regular dividends, raise their dividends annually, and give upside potential on their common shares. Short of private placements or insider trading that’s the best deal in town given the amount of risk assumed.

Just like I leave room in my closet for a few sizzlers, I carve out a small percentage of my portfolio for excitement. So far my choices have always done well in the long-term but with lots of volatility in the short term.

It’s wise to remember the words of investor George Soros: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

I never wore the pink chiffon dress. The next day, overcome with buyer’s remorse, I went back to the vintage shop to return it. The manager put up a good fight but, in the end, she took it back. Feeling immense relief, I put the money back in my wallet and soon found some other stupid thing to buy.

Anti-Gravity

Photo courtesy of Yannis.

Oh, how I love the sound The Sunday New York Times makes. That promising thunk as it hits the door early in the morning. This week’s edition features a thought provoking essay by Frank Bruni on a book by Sam Harris. The book in question, Waking Up, is due out next month. In it, Harris poses the question, “Do we need religion to experience spiritual transcendence?” He posits the not unreasonable argument that perhaps spiritual feelings are part of the human condition and religions merely piggy-back on what already exists. The various religions simply provide it with a narrative framework. Hey, wouldn’t it be nice if there were no religion (e.g. no religious wars/dogma/garb/superstitions…)? Fat chance. But I digress.

Our human need to cultivate spiritual experiences is one way we temporarily escape gravity, the weight of quotidian life that both comforts and constricts us. Whether through prayer, mantra, meditation, nature, creative work, art, books, music, gardening, exercise, spa days or shopping expeditions, Neflix, or playing fetch with the dog, we all long to lighten-up and be part of something bigger than ourselves.

Another form of religion is money. Many of us dream of a sudden windfall. Some of us dream of fine jewels, others of luxury cars, the more altruistic think of charities. Whatever path our fantasies take, they all lead to a similar feeling: Taking us away from the daily grind.

Money is one escape route, though it’s not the only, nor the best one. But in purely literal terms, it’s an anti-gravity whiz. With it, we can literally fly to exotic locales at a moment’s notice, or lift any body part unkindly treated by gravity’s work. It unyokes, freeing us to pursue studies, hobbies, retreats, and other heartfelt desires. And, anyone who stands in the way of our dreams can just piss off.

But maybe this craving for money, for the ‘magic number’ that will set us free is really a spiritual craving in disguise? The quest isn’t for money, it’s for transcendence.

Recent trends like the ‘renting economy‘ whereby more and more people are taking a pass on owning things, and, instead, are using social media to pay-as-they-go, is another indicator that people want to lighten-up.

Owning is gravity-making. Renting is anti-gravity. This trend is especially strong among the Millennials, perhaps as a reaction to the materialism of the Boomer generation.

Who knows, maybe lightening up will turn out to be a reliable path toward enlightenment? No need for a horsehair shirt, that’s so 15th century, just rent a Versace gown and Prada clutch as needed. Then money, as darling as it is, will not be the end, but only the means.