Bring on the new year! Q4 2021 Commentary.

2021 in a nutshell

As 2021 draws to an end I think back to the events that have occurred over the past year and how each one of those events could have convinced even those with the highest confidence or intellectual levels to jump out of their stock holdings into “safer” assets.

Be it the storming of the capital, further COVID waves, high inflation, interest rate hikes, or the fact that Daniel Craig will not be starring in any more Bond films… each one of these events could have had the ability to churn your emotions and convince you that “now is the time to sell”. Had you succumbed to these urges, you would have likely moved your money to either the bond market or left it as cash in a savings account. Here’s why that would have been a mistake.

A major Canadian bond fund has seen max drawdowns of -4.92% (before inflation)

Savings accounts and GIC’s have offered very low returns as well (often below 1%) and if we look at that number after inflation, it is also negative. However, the picture isnt all rosy for stocks either… if we look at some of the most talked about stocks for 2020 (the Covid benefactors), we see the following returns over the course of 2021:

- Zoom: -48.14%

- Alibaba: -52.92%

- PayPal: - 21.67%

I could continue to go on, but I think this paints a sufficiently negative picture.

What's the solution?

So at this point in the article, I have effectively told you that all the main asset classes have seen some hard times through 2021. What is the solution?

The solution to building wealth is to stop looking at these asset classes as entire groups and to start (or continue) focusing on the individual businesses that underly these financial securities. We need to reduce the number of times we reference “the market” or “stocks” as a whole. With roughly 4000 publicly traded companies in the United States, many can be classified as “bad businesses”, but some will be “great businesses”. This is always changing with some good businesses going bad and some bad companies successfully turning around their financial situations.

Among those “great” businesses, at any given point some will be overvalued, and some will be undervalued. Over time the market value (stock price) should converge with its intrinsic value (fair value). This is how our portfolio managers are able to sustainably grow wealth. By turning away from glamourous 1-year numbers and keeping their focus on the fundamentals of the companies we own, they are able to purchase companies they believe to be “great” or “quality” at a price below their

intrinsic value. Due to the amount of work that goes into finding these companies, the only reason we should sell them is if the market pushes their stock price significantly above it’s intrinsic value (as that would present a new downside risk). The other reason to sell would be if there is a material change in how the company is run that might turn our company into a “bad company”.

Some relevant points.

It’s one thing to say that you understand the companies you own, and a completely other thing to go through the annual reports (these are usually over 100 pages) of each company you own and then build a financial model to value it.

A co-worker giving you a “hot tip” doesn’t mean you know the company. With the assumption that he/she has above average financial literacy, your co-worker is probably exhibiting confirmation bias in their research (only searching for information that confirms personal theories about the stock). Even if it is a good company trading below its intrinsic value, without a portfolio manager (or doing the work yourself) that has a fundamental understanding of the company’s worth, you won’t have the conviction to continue adding or holding your position if the stock price continues to go down. This will leave you with a net loss of both time and money.

• If you are buying a company without analyzing its business and projecting conservative future cash flows, you are “speculating” and not “investing”.

• If you are buying a bond of a company without analyzing the business and understanding it’s ability to service those interest payments and eventual principal payback, you are “speculating” and not “investing”.

I am not going to scold you for speculating with your life savings, but I will advise against it. When you fall prey to chasing returns, you usually end up with below average returns at best and at worst, you put yourself in the position of true wealth destruction which will significantly reduce your ability to compound your future wealth.

• The reason speculation seems desirable is that we all talk about the person who was turned into a millionaire over night, but we never talk about the hundreds that will never reach millionaire status due to their compounding cycle breaking because of significant and justified losses.

2021 as a whole.

Finance is not like “The wolf of wall street”. For most people, it should be viewed as boring and tedious work. But for those with a passion for it, the excitement does not come from stock price movements, but instead from finding that “great company” and being able to buy it significantly below its “intrinsic value”.

2021 was a great year for our teams and I for one am excited about the companies in the portfolios. I hope you are as well! See you all in the new year!