Five things that need changing in the fluctuating world of stock markets
Peter Hodson's message for future PM? Tax the speculators and day traders.
I have (hopefully) picked up a few tidbits of knowledge after about 40 years in the investment industry. But one of the reasons I love this business is that there is always something new to learn. No one will ever know everything about investing, and no one — and we mean no one — really has any idea what is going to happen in the markets tomorrow.
This makes a career in investments challenging and entertaining. There is never a dull moment. Still, here are five things I would change if I were in charge to make investing life a little more, well, predictable and fair.
1)
Banish analyst price targets
Goldman Sachs this week cut its target on Twitter Inc. to US$62 and called it a “sell.” Why is this noteworthy? Well, in February, the same broker raised its target on Twitter to US$112 and called it a “buy.” In barely seven months, the target price was reduced by 45 per cent. Investors following Goldman's logic would have gotten completely whipsawed.
Is Twitter so bad? Not really: The stock is up 11 per cent this year and 54 per cent in 52 weeks. But I really think target prices do a disservice to investors.
Ignoring that most are wrong anyway, they encourage excessive trading and set up a case of FUD: fear, uncertainty and doubt.
Need more proof ? How about this quote from an analyst's report in 2011 on Amazon.com Inc.: “Despite Amazon's outstanding fundamentals, its stock is overvalued and over loved.” The report had a Us$125-per-share target.
Sure, it's been a decade since then — not really that much time in market land — but Amazon today is US$3,446.
2)
Change taxes to reward investing
Let's face it, taxes are going to go up in Canada. After all, we have to pay for all this pandemic spending, somehow. Right now, capital gains are taxed at 50 per cent. But it doesn't matter if you hold a stock for five minutes or five years, your tax rate will be the same.
Other countries have different methodologies, with some, such as the United States, having a higher tax rate if investments are held for a shorter time period. This makes sense to us, because investing should be rewarded, while trading should be discouraged.
If you're day trading, you're not really supporting any company. You're just seeking quick profits. Buying shares in a company and holding them for years is harder, but, ultimately, more rewarding and should be encouraged by policy-makers.
A note to whoever wins the election next week: Tax the speculators and day traders, not the real investors who are beneficial to the country.
3)
Rethink free trading
After sweeping across the U.S. these past few years, free stock trading has arrived in Canada, with several brokerages announcing commission-free trades this year. This sounds good, but it's not as good as you think.
We're all for lower costs, but free trades really, really encourage excessive trading, which results in more taxes (see above) and lowers the amount of capital available to compound.
Volatile spikes in certain meme stocks have certainly increased because of zero trading costs. If we were in charge, we might ban free trades, but we might not have to if short-term trading taxes were increased.
Essentially, we just want people to invest and not trade. After all, how many day traders do you see on all those world's richest people lists? Answer: None.
4)
Ban the phrase, “That stock is so expensive”
We're kind of sick of how much we've heard this phrase this year. Many people are expecting a correction because stocks are so expensive based on historical metrics. Well, guess what? The buyers today obviously do not think stocks are expensive. They're not buying with the expectation of losing money.
We chuckled after seeing Grit Capital's recent thoughts on the Shiller P/E index, a measure of market valuation indicating the market's valuation is 47 per cent higher than its 20-year average. Its comment sounded ominous, until it added that “following the famous P/E rule over the last 40 years, you would have owned equities for a grand total of 7 months (eye roll).”
5)
Apply investor rules equally
If you are an accredited investor, you know how much of a pain the paperwork can be to invest in a hedge fund. The government wants investors to be protected, so it only lets rich investors access some products, on the thesis that they can take more risks. That's all fine and great, and, at least in theory, makes sense. But what about extremely risky products that get regulatory approval and trade on stock exchanges? Nearly anyone can buy those, whether they are experienced, rich, young or whatever.
Sure, brokers still have knowyour-client rules, but an investor who calls themselves aggressive can go out and buy double- or triple-leveraged exchange-traded funds (ETFS) all day long. Let's look at Direxion Daily Junior Gold Miners Index Bear 2X Shares, a leveraged ETF on junior golds. Its three-year annualized return is negative 82.1 per cent. How about the Proshares Ultrashort Bloomberg Natural Gas Index ETF? It's down 80 per cent this year alone. If I were in charge, I might apply some new restrictions, or at least warning labels, on some of these investments.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/short Fund may own non-canadian stocks mentioned.)