FOR INVESTORS WHO IGNORE FUNDAMENTALS, THE DOCTOR’S DIAGNOSIS IS ALWAYS CRITICAL
Speculating on short-term stock moves is far from sustainable, Tom Bradley advises.
There are people who liken investing in stocks to gambling. They say it’s rigged in favour of the house. While I don’t agree with this view, there are investors who treat the market like a casino. They ante up with their retirement savings and trade actively, hoping to catch the up swings and avoid the down drafts. They’re not buying shares to participate in a company’s success, but rather are looking to sell at a higher price minutes, hours or days later.
I’m a long-term investor who believes that short-term price movements are unpredictable, even random, and have often imagined myself doing a therapy session for high-volume traders. It might go something like this: Doctor: Hello everyone. My name is Dr. Steadyhand. As I understand it, the three of you actively trade Manulife shares (symbol: MFC). Let’s start by talking about why. Fred, what is it about Manulife that intrigues you? Fred: Doctor, just look at the chart. It’s trading 35 per cent below its all-time high. It has tons of upside.
Doctor: What about you Julie?
Julie: MFC trades in a range. It’s perfect for moving in and out of. I’ve made a ton of money buying under $22 and selling above $24, although I must admit, this last move to $27 caught me by surprise. I got out too early.
Doctor: And Owen, when did you start trading Manulife?
Owen: Well, I’m a dividend guy and MFC has a great yield. Almost four per cent. After they cut the dividend in 2009, it stabilized and is now increasing steadily. I try to predict when they’re going to raise it next, so I buy and sell around the board meetings.
Doctor: I know a little about Manulife, but I’m not up to date. What are the earnings estimates for next year? Is their investment in Asia paying off?
Julie: I don’t really know, but with this latest move in the stock, I’ve raised the upper end of my range to $28.
Owen: I don’t care about earnings. Just dividends.
Doctor: Hmmm … dividends come from profits … oh, never mind. What about the real issue with MFC — capital management. How sensitive is the company to moves in stock market, or has the exposure been fully hedged?
Fred: Doc, there’s so much upside here. It could go up 50 per cent and just be back to its 2007 level.
Doctor: I know insurance companies are sensitive to interest rates. The stocks usually rise when rates are rising. Is MFC a hedge against higher interest rates?
Owen: Why are you asking these questions? I just want to get into the stock before they raise the dividend.
Julie: Yah, I don’t see how interest rates affect Manulife. I’m trading a stock, not a bond.
Fred: Doc, you’re out of touch with what’s going on. Commissions are so cheap now. My new broker is giving me 300 free trades. I can do this at lunch hour on my phone.
Doctor: Well, that may be the case, but none of you seems to know much about Manulife. You’re trading on past glory, chart patterns and dividend announcements. You might also think that Warren Buffett was out of touch when he said, “When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m looking to the business to produce returns for me in the future. If I care whether the stock market is open tomorrow, then to some extent I’m speculating.” It’s not as much fun as your approach, but the easiest and most dependable source of return is the market return. With the benefit of time, a diversified stock portfolio will zig and zag higher, paying dividends along the way. Speculating on shortterm stock moves, on the other hand, is far less reliable and sustainable. I’ll let you go now and encourage you be honest with yourself. Keep track of your returns versus a conventional stock portfolio or fund. And please, if you would, report back on how you’ve done after trading through a cycle that includes both bull and bear markets.