Monthly Commentary – December 2014 : Please click here for a PDF version.

December 2014                                                                                           The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on some of the people at MacNicol & Associates Asset Management Inc. (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.

“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” – Benjamin Graham

Market Commentary: Initial Outlook for 2015

Recently, Jay and I both attended a Raymond James conference in St. Petersburg, Florida, which was presented by Jeff Saut, Raymond James’ Managing Director of Equity Research. Mr. Saut’s presentation resonated with us both, as many of his views being put forth through the presentation were in line with our own thoughts.

The main theme of the presentation was the idea that we are currently in a secular bull market, which will be led by a strengthening U.S. recovery. For those unaware, a secular bull market speaks to an intermediate amount of time where the general trend of the major stock indices is upward. Most importantly, a secular bull market does not rule out the possibility of near-term market pull backs. As stated by the father of Value Investing, Benjamin Graham, “The essence of portfolio management is the management of risks, not the management of returns”, and even in a bull market, a decent amount of risk still exists within the system.

Some of the key statistics supporting this thesis are listed below:

  • 2014 full-year earnings for the S&P is expected to come in at roughly $115 a share, and continue growing to an average forecast of $135 by the end of 2015. If corporate earnings for 2015 are anywhere close to this figure, earnings will have effectively tripled since 2008.
  • Soaring domestic creativity and technological advances, massive energy reserves, large amounts of capital and an alive-and-well U.S. industrial renaissance are all working in favour of the U.S. economy.
    • The U.S. is still the world’s leading manufacturer, with an 18.2% global market share. China is second at 17.6% market share.
    • Home-ownership levels, household formation rates and consumer debt levels are all improving, marking a possible turnaround for the beleaguered single-family home market which typically drives a housing recovery.
    • Automotive manufacturing and housing are two of America’s leading industries in terms of employment, and if these sectors continue to improve, economic weakness will be unlikely.
    • Overall, the economy in the U.S. is headed in the right direction, which is the most important point to consider. As Canada’s largest trading partner, and due to our countries’ corporate ties, this is also good news for the Canadian economy.

The major aspect of this thesis that we would like to stress is that, although we agree with the idea that the general trend of North American markets will be upwards for the next few years, this does not absolve our primary concern being risk management. A secular bull market presents growth opportunity for portfolios, however, risks persist at both a near-term and sector specific context. We believe that the best way to capitalize on this trend will be to obtain high exposure to Canadian stocks which derive large portions of their revenues from the U.S., while shying away from out-of-favour sectors such as oil and gas stocks at the moment. However, moving forward, we also believe that the secular bull market will eventually allow for buying opportunities in such beleaguered sectors, and as such, we consistently maintain ‘shopping lists’ for sectors which we will seek to invest in once market fundamentals change. Additionally, we also maintain our view on the value of precious metal stocks as ‘portfolio insurance’. This is a sector which has recently fallen out of favour, however, current valuations of many stocks within the sector are attractive, and these positions would likely be integral to capital maintenance in a scenario where markets took a temporary turn for the worse.

Behavioural Investing:

For this month’s section on Behavioural Investing, we thought that we would detail another important concept of Behavioural Finance: Herd Behaviour.

Herd behaviour describes how individuals act in similar ways collectively, without proper independent thought, for the simple purpose of following a popular trend. Indicating areas of the market where this sort of behaviour is prevalent is vitally important in the world of investing, as it is often the driving force behind market bubbles and stock valuations which aren’t rooted in traditional fundamentals.

One of the most infamous culminations of herd behaviour was the ‘dot com bubble’.  The advent of the internet had revolutionized the possibilities and realities of business, and it seemed as if everybody and their mothers were seeking to capitalize on the trend and create a new start-up company that would become the next Microsoft. Some of these companies were truly revolutionary and operated strong business models with excellent execution, however, many of them were fueled by hype, burned through money at an astonishing rate, and had no realistic prospect of profit in the immediate future.  Once Wall Street drank the Kool Aide, the bubble took off to egregious heights, as stock brokers heralded the ‘new age’ and assured individual investors that traditional valuation techniques were no longer viable in the new age of the internet. Instead of analyzing companies based on their earnings, cash flow or sales, analysts were touting newly contrived metrics such as ‘sales per click’, and retail investors poured money into the market with little to no idea what they were investing in. Of course, when the bubble burst, many of these investors lost near everything, and had paid a severe price for a first-hand lesson of the dangers of herd behaviour.

Aside from potential capital loss, partaking in herd behaviour also tends to lead to frequent transactions, as investors constantly seek to find the new ‘it’ technology or market. This strategy typically leads to significant transaction costs, and more often than not, the investor is a late-comer by the time the trend is made aware to them.

In order to avoid herd behaviour, it is important to remember to keep it simple; the conclusion which requires the least amount of assumptions is often the correct one, and has less chance of back-firing. Stick to the basics and always do your homework. Albert Einstein said it best by stating “If you can’t explain it simply, you don’t understand it well enough.” This is also a concept which is upheld by Warren Buffet, and a mantra which we at MacNicol attempt to adhere to as well. Avoid complication, stick to the fundamentals, and always do your own work.




For the personal section this month I’d like to talk about some charity work and also about a conference that Jay Bryant and I recently attended.

This past September I attended the 18th Annual Yellow Bus Golf Marathon. Along with 40 other golfers, I played over 100 holes which took over 13 hours. We were lucky to have good weather this year as we have not had such luck in past years. This year’s event supporters were: Blake Boultbee Youth Outreach Centre, Centennial Infant & Child Centre Foundation, The Jennifer Ashleigh Children’s Charity, Kids Up Front Foundation, Power to Be Adventure Therapy and The Regent Park Duke of York Children’s Charity.
Together, we help many children face challenges, achieve dreams and create hope for the future; including 5 year old Nathan, diagnosed with Spina Bifida, Hydrocephalus and kidney reflux. Together we covered the costs of his specialized trike. Nathan can now keep up with his siblings and help his sister with her paper route! As I get older I find the day more and more challenging. However, this is more than offset by knowing that these charities are benefiting from our work.

Also, I sit on two investment committees for a religious organization. Although this is time consuming, I find it worthwhile as there are other investment professionals on the committees and we are able to share ideas and information. We all learn a great deal from each other. Decisions are made with the help of various presentations from a wide range of investment firms. I am able to take something valuable away from each presentation and it allows me further insight into what other institutional money managers are doing and their outlook on the markets.

Finally, Jay Bryant and I recently attended a Raymond James conference in St. Petersburg, Florida. There were many fantastic and inspirational speakers who presented. One of them was Tom James whose father founded Raymond James and we were most impressed learning of the success of his business including how it weathered the credit crisis without having to take a dime from the government. Raymond James was founded as a family business and while it has grown beyond that, it still has a “family feel” to it. There were other speakers concerning retirement planning and the psychology of managing other people’s money – to name a few. The conference finished up with Billy Beane, General Manager of the Oakland Athletics and the inspiration behind the movie Moneyball. Both Jay and I found his story to be very compelling. Hopefully the trade the Toronto Blue Jays recently made with the Oakland A’s works out considering Billy Beane’s track record.


Wishing you and your family a Merry Christmas and a happy and healthy New Year.



David A. MacNicol, B.Eng.Sci., CIM, FCSI


Portfolio Manager

MacNicol & Associates Asset Management Inc.

December 2014