The good news is the economy and stocks are in better shape than we anticipated. Compared to their respective pre-pandemic peaks on February 20, 2020, the Canadian and U.S. equity benchmarks yielded total returns of 9.4% and 12.8% through to mid-March 2021, measured in Canadian dollar terms. The bad news is we haven’t kept pace with the benchmarks; our Model is up 5.7% over the same period.
Historically, our long-term, benchmark-beating record has been achieved by losing less during market setbacks and underperforming in fast-rising markets. While that general pattern held true around the pandemic crash and subsequent recovery, the cumulative outcome has been less favourable than past market cycles.
We were more cautious than usual during the pandemic-induced crisis this past year. We raised cash prior to the market crash, and we were slow to deploy it as economies and markets recovered. Moreover, we sold a few higher-risk stocks at depressed prices in and around the height of the storm. Those actions cost us, as we locked in some losses and missed out on some opportunities by holding cash that didn’t generate much return. Like an insurance policy that wasn’t needed, playing it safe didn’t pay off.
While we can’t get our insurance premiums back, we will adhere to the approach and discipline that have delivered market-beating performance in the past. Our approach is not flashy, but it works.
One of the keys to accumulating wealth is not permanently destroying capital by chasing and overpaying for speculative stocks. As described in the previous article, there is an enormous amount of highly speculative activity in the market lately, and it’s reminiscent of the dot-com bubble at the turn of the century. While it’s hard for price-conscious investors like us to keep up in such markets, history teaches that it is better to be safe than sorry. The best way to avoid the fallout when the inevitable bubble bursts is to not participate in the speculative activity.
Underperforming in the short term can and will fuel many unpleasant emotions, including frustration, regret and envy. However, if the past is a guide, discipline will yield relief and rewards.
We own many great companies that are reasonably priced, and we remain confident that our collection of businesses will outperform the general market over time.
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