Every time I see everyone “piling on” I think of a movie from my youth. It gives me an exact visual of what is about to happen.
I watched a John Wayne movie with my father called Circus World. The owner bought a ship and sailed to Europe to bring them his circus. At Lisbon, the first port of call, it capsizes at the pier. All of the animals and humans congregated on the same side of the ship. The ship capsized and sank.
There was nothing wrong with the ship or the number of mammals on the ship, but when they collected in the same place it inevitably tipped over.
I wrote about this “piling on” in a blog on December 2014 titled When Everyone Knows it, it Ain’t Worth Knowing. In this blog, I wrote that all dividend paying stocks don’t have the same risk.
Billions of dollars were chasing dividend return and only dividend return. At that time, high dividend paying oil stocks were driven up to new highs even though oil itself was starting its downturn.
These stocks fell dramatically, many as much as 80% and cut their dividends; many stopped paying dividends.
The Capsizing of your Investments
Everyone was on the same side of the TRADE, artificially driving up the prices and then it capsized when the commodity fell off the face of the earth. Even worse was the loss of dividend income.
Here we are almost two years later and Dividend paying stocks are again (for many still) all the rage. This has resulted in far too many articles, mutual funds and ETFs telling people to invest in a style of investing called LOW VOL.
Low Vol stands for low volatility and it reasons that when they went back and measured what stocks and sectors were hurt less in the downturn in 2008/09 most were dividend paying stocks. The problem is that no actual homework is done on these stocks, they are just bought. Many are over-levered and/or are in a different place right now because all of this buying is driving up their stock prices.
This is another case of us Drowning in Information, while Starving for Wisdom. While their statistics may be provable, statistics must be understood and proper research must be done. I wrote about this in October 2015. Most of the rise in the Low Vol area is only because so many investors have been convinced to invest over the last few years. They will not leave as gradually.
I see the visuals in Circus World in this Dash to Trash and everyone jumping on the LOW VOL side of the ship will cause VOL. This volatility will be to the downside and since most of the investors are in this because the can’t stand volatility, they will stampede to the exits – the investment equivalent of capsizing.
I wrote about this phenomenon in A Very Disturbing Trend in June of last year when certain advisors were not doing their homework. They spent their time finding an easy story that will bring in more clients and money. Didn’t matter if it was right, just that it worked in the advisor’s favour. This can be a business that rewards bad behaviour in the short term.
Piling on Low Vol will cause High Vol. That is great for those not stacked up on the wrong side of the trade. Being intelligently invested will outperform. As I wrote in I Love a Good Correction, opportunities will be created whether this is a widely-felt correction or focussed just on this sector of the market.
STUDS, an acronym for Staples, Telecom, Utilities and other Dividend Stocks, are 50% to over 100% higher than the market peak in 2008, while the vast majority of these stocks’ fundamentals have actually slipped. These are the Low Vol Sectors being bought and driving the prices higher than the fundamentals warrant. At best, you should expect these to underperform, but are more likely to correct – becoming DUDS.
Low Vol ETFs will further exasperate this phenomenon by driving down all the stocks in their portfolio, even those of good relative value. Thus, even more volatility.
Your Independence Matters
Terry McIntyre is an independent investment advisor with Manulife Securities and can be reached at: 905-896-9060, ext.3838, email: Terry.McIntyre@manulifesecurities.ca or website: www.terrymcintyre.ca
This material is not to be construed as an offer or solicitation. The securities mentioned may not necessarily be considered suitable investments for all clients. Contact your Investment Advisor to discuss your individual investment needs.