So, we endured yet another day of bleeding index boards. Usually, after a sell-off, we would see speculators come back for a “vulture run,” to see if there is anything left worth picking up from the carnage. But in the Tuesday “Globe and Mail”, Murray Leith, the director of research at Vancouver-based Odlum Brown, said there might be nothing left that even speculators would dare to be bothered with.
One of Leith’s observations concerning the S&P/TSX Composite could send plenty of shivers down many investors’ spines. According to a bit of financial math, Leith concluded that if Alcan, BCE and Research In Motion were excluded from the index, Canada’s benchmark would actually be posting a negative year- over-year return and not the advertised 3.2% for 2007 so far.
To make matters worse, soon we might not even need to do hypothetical math. Alcan has gone through a takeover, while BCE has been sold. Only Research In Motion keeps on “playing in the sand” as if the rest of the world does not exist, but how long that can be kept up remains to be seen.
Of course, the S&P/TSX is keeping good company. The credit crunch south of the border has caused the Dow Jones Industrial Average to shave off about nine percent of its market cap, just as Canada’s benchmark has. Luckily, both indices posted gains earlier in the year, which resulted in keeping their heads above water for the time being. In contrast, the S&P 500 has been shaved bald and then some.
Of course, the next question is what should ordinary investors do? At times like these, they surely cannot go about selling stakes in their portfolios to rich foreigners. Should everyone just get out of the stock market, park their money in cash, and wait it out?
Well, according to Leith, buying Canada Savings Bonds and guaranteed investment certificates is not the right answer. Moreover, “[Investors] should be looking for bargain-priced stocks, because this is precisely the sort of environment that produces them. Now that more investors are fearful and pessimistic, and stocks have been marked down accordingly, we are more upbeat regarding the opportunity to make money in the stock market.”
Apparently, Warren Buffett is of the same opinion, as expressed in his letter to Berkshire Hathaway shareholders. “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
So there you have it. Experts say it’s not only bad, it is actually worse than it looks. Yet, it is also traditionally the time to buy severely discounted equities. I would probably be joining the chorus too if it did not feel as if the silver lining or that proverbial half full glass did not seem so far, far away and, in between, there are far too many sell-offs, as we saw in the last few trading sessions.