SPECIAL REPORT

Sailing Through the Cyclone

TOM FENNELL November 10 1997
SPECIAL REPORT

Sailing Through the Cyclone

TOM FENNELL November 10 1997

Sailing Through the Cyclone

Prudent investors have learned how to weather stock market storms

SPECIAL REPORT

Business

TOM FENNELL

Toiling in his workshop overlooking the blue waters of Burrard Inlet in Burnaby, B.C., Bob Sterne seems safely insulated from the hurly-burly of the world's equity markets. Fibreglass moulds for the radio-controlled model sailboats he builds for a living are stacked against a wall and a workbench is covered with tools. But in the corner, a television set broad casting the latest financial news shatters the tranquil-

ity with rapid-fire commentary from the floor of the New York Stock Exchange. The news this day is grim, bordering on catastrophic. Sterne, who has $200,000 invested in the stock market, puts down his sander while an excited announcer describes the carnage: almost every blue-chip stock in North America has been hit. The benchmark Dow Jones industrial average is plummeting—and will end the day down 554 points, the greatest single-day point loss in its history.

Far from panicking, Sterne held firmly to his investments as the markets continued to gyrate last week.

His reaction was hardly unique. Across the country, nervous investors phoned their brokers in search of guidance and advice, but few actually gave the order to sell. In fact, many saw last week’s market dip as an ideal buying opportunity after three years of dramatic increases in share prices. “I just wish I had more money,”

Sterne said early in the week, before the North American markets began a sputtering recovery. “I’d start buying stocks at these prices.”

The market’s swift turnaround left many investors feeling as though they had just walked away unscathed from a vicious car wreck. On its worst day last week, the Dow finished at 7,161, down 15 per cent from its all-time high of 8,259 set on Aug. 6. The Toronto Stock Exchange’s 300 index, meanwhile, lost 2.7 per cent during the week, and is now down 6.2 per cent from its high of 7,209, set on Oct. 7. The hemorrhaging may not be over. Many investment strategists predict the markets will take investors on yet another wild ride as stocks head lower over the near term. “This was a dead-cat bounce,” said John Ing, president of Montreal-based Maison Placements Canada Inc. “We

could go lower from here.”

If that forecast proves correct, millions of Canadian investors may begin to rethink their love affair with stocks and equity mutual funds. For now, however, the mood remains generally optimistic. Since Black Monday in October, 1987—the day the Dow Jones index lost 22.1 per cent of its value—financial advisers have been counselling their clients to invest for the long haul by building diversified portfolios of stocks, bonds and fixed-income securities. That message seemed to find a receptive audience in the 1990s, as stock market investors reaped gains averaging about 19 per cent per year since 1992.

The bullishness was obvious last week at a branch of the CIBC in downtown St. John’s, Nfld. All week long, account holders visited the branch to deposit money into their mutual funds. Mike Maguire, 27, an account manager at the bank, wished that he, too, could have put money into the market. “It kills me that I’m cash poor or I would have bought equities on Monday,” Maguire said.

“My roommate put an extra $1,000 in his mutual funds.”

Through it all, many investors remained convinced that the cause of last week’s market sell-off—a financial crisis gripping Southeast Asia— would ultimately have little impact on North American markets. That crisis began in the spring when currency traders, convinced that Asia’s fast-growing economies were due for a correction, began a series of attacks on the currencies of Indonesia, Malaysia, Thailand and the Philippines. As exchange rates tumbled, investors fled the region’s equity markets, triggering a rash of corporate bankruptcies.

Hong Kong, traditionally an island of stability among Asia’s

volatile markets, was initially spared. But late last month, currency speculators took aim at the Hong Kong dollar in the belief that real estate prices in the former British colony were inflated and that any slump in the property market would severely damage Hong Kong’s banks, which are heavily exposed to the property sector. To prevent a run on the currency, Hong Kong authorities raised interest rates—which in turn sent stock prices reeling. As investors shifted into safer fixedincome securities, the market quickly lost 35 per cent of its value in little more than three weeks.

When Hong Kong dropped another 5.8 per cent last Monday, some North American investors took it as a sign that the bull run was finally at an end. By 2:30 p.m., the Dow had lost 350 points, prompting exchange officials to halt trading for 30 minutes— a contingency introduced after the 1987 crash to limit the risk of another market meltdown. The shutdown was intended to give investors time to cool off, but when trading resumed the index immediately fell another 204 points. In the end, exchange officials decided to close the market a half-hour early at 3:30 p.m. “None of us expected the market to just shut down,” said Robert Ray, an options trader with Carr Futures Inc. in New York City. “At least it was orderly, however uncontrollable it was.”

There is an old Wall Street saying that a panic bottom never holds, and that stocks usually fall again the day after a hurried selloff. So when traders returned to work on Tuesday morning, they were expecting another terrible day. Sure enough, the Dow lost another 179 points in the opening 30 minutes as brokerages pushed through a mountain of sell orders left over from the previous day. Then, the tide began to turn. As the number of buy orders slowly increased, large institutional investors moved in to snap up devalued shares. IBM’s announcement that it planned to buy back nearly $4.2 billion worth of its own shares helped to restore confidence in the market and contributed to a 337-point rebound in the Dow index.

Scott Penman, a Winnipeg-based mutual fund manager for the Investors Group, was among those who seized the moment. Penman blamed the earlier collapse on speculators and so-called day traders who constantly move in and out of the market. When share prices opened lower on Tuesday, he decided that he had been presented with a tremendous buying opportunity. “We bought some stock at values that were just jump-up-and-down buys,” said Penman, adding that he expects the market to resume its upward march. ‘The factors that have driven the mar-

ket—low interest rates and higher earnings—are continuing.”

Small investors also waded into the fray. John See, president of TD Greenline, the nation’s largest discount brokerage, said trading volumes were 60 per cent above normal, with buyers outnumbering sellers by a five-to-four ratio for three consecutive days. “Our retail sales were strongly weighted on the buy side,” said See. “Our clients told us, We’ve been expecting this sell-off and now is our chance.’ ”

There may be many more such opportunities ahead. Stock valuations are still near historic highs, and the slightest tremor is likely to send the markets on another roller-coaster ride. “The market has entered a 15-to-20-per-cent correction,” said Katherine Beattie, a market analyst at MMS International in Toronto. “The catalyst for the correction is what happened in Asia. It shows how fragile the market is.”

For some market players, the volatile outlook underscores the importance of developing a long-term investment strategy. Days before last week’s market turmoil, Dawn Marchand, a founder of the DINKS (Dual Income, No Kids) ’92 investment club in Windsor, Ont., was trying to convince her fellow club members to focus on stocks that could hold up well in the face of a sudden collapse. The club, founded in 1992, has 13 members, a long waiting list of people who want to join, and nearly $80,000 in assets. Over the past five years, Marchand says, DINKS members have outperformed all but a handful of Canadian mutual funds, tripling their money in that time. Despite the recent market volatility, it is business as usual for the group. Their next meeting is set for Nov. 11, at which time they will discuss which grocery chain or food producer to invest in. We don’t buy stocks like Bre-X,” Marchand says. “Everyone has to eat, so we’re looking for a growth stock in that industry.”

The club’s portfolio already contains several solid performers, including Imasco Ltd.—parent company of Imperial Tobacco and Shop-

pers Drug Mart—Bom-

bardier Inc. and Investors Group. When the dust settled following last week’s correction, the value of their portfolio had scarcely budged, down two per cent. Marchand and her friends actually talked about buying more shares as the market seesawed last week. “I checked on the Dow at work,” said Marchand, 35, a marketing co-ordinator with the accounting firm KPMG in Windsor, “and my first thought was, ‘How do I get more money?’ I wanted to buy more.”

George King, 62, of Cobourg, Ont., also kept

a close watch on the market’s wild swings. King, who retired at 55 from his job as a credit manager at Petro-Canada, had just cashed in an $18,000 guaranteed investment certificate and was anxious to deposit the money in a mutual fund. But when shares fell precipitously early in the week, he decided to sit tight. As the initial wave of selling subsided and prices began rising, he dashed to his bank and invested the money in two equity-based mutual funds. “I missed out on a couple of percentage points worth of gains,” he said, “but there was no way I was going to put it into the market when it was falling.”

While they wait for the markets to make their next move, investors can take a number of simple steps to protect themselves against future volatility. The first thing they should do, says Grant Sylvester, chairman of Money Concepts (Canada) Ltd., which oper-

ates 93 investment centres across the country, is determine exactly what is in their portfolios—a seemingly obvious step that investors too often ignore in the rush to buy the latest hot stock. Those whose investments are heavily weighted towards explosive sectors such as hightechnology, where today’s star performer often becomes tomorrow’s loser, should consider switching to a more diversified mix of companies. Lollowing last week’s turmoil, Sylvester told some of his clients—who have as much as 70 per cent of their investments in the stock market—to cut back and shift

the excess into bonds and fixed-income securities.

Other investors say they will stick to the strategy that worked for them in past. Roland Baert, a 51-year-old mechanical engineer in Calgary, has been in the market for more than a decade and keeps his stocks for about four years. Like many other investors, he is gambling that the period of low interest rates and high corporate earnings that has fuelled the market’s bull run will continue. “We’ll likely go sideways for a while,” says Baert, “but money has to go somewhere, and it will likely be put back into the market.”

Still, the lack of caution shown by investors last week left some people shaking their heads. “Compared to 1987,” says Ing, “there seems to be a calmness bordering on complacency.” Jury Kopach, vice-president of retirement services at Toronto-based T. E. Linancial Consultants Ltd., prescribes a simple reality check for those who

are convinced that the market will continue to rise indefinitely: they should pull out their driver’s licences and check their age. The older someone is, the riskier it is to hold a large portfolio of stocks and equity mutual funds. Kopach routinely advises older clients to reduce their exposure to the stock market—but at the same time he says they should not to be panicked out of the market when prices are low. “The markets are going to improve,” Kopach said. “Wait until your portfolio comes up to its previous level and then make an adjustment.” Others interpreted the market shakeout as a loud wake-up call. Shareholders, says Alan Berge, a Vancouver-based investment adviser for C. M. Oliver & Co., should take the opportunity now to reassess their positions. “Sometimes a correction like this is a good time to reinforce a more balanced approach,” he adds. “I’ve had clients who have done very well in bonds”—which tend to rise when stocks fall— “during this volatility. There has to be some give and take.” Stephen Jarislowsky, a partner in the Montreal investment firm Jarislowsky Fraser Ltd., offers another time-honored rule for surviving market downturns: “Buy good-quality stocks at fair prices and don’t worry about them.” Although Jarislowsky still believes the market is overvalued, he says long-term investors will reap respectable gains.

The trick, as always, is to ignore the short-term fluctuations— something few investors seem capable of doing. As he monitored share prices on a public computer on the second floor of the Alberta Stock Exchange Tower in downtown Calgary last week, Pete Lorden, 71, said he was bracing for another meltdown. “I think we’re going to see an even larger dump in the future,” Lorden said. ‘We didn’t see an even bigger fall because there was so much money sitting on the sidelines held by people expecting a correction. That money was sucked up with the rally on Tuesday and I think it’s cleared the way for a much bigger drop.” The roller-coaster ride may not be over yet.

DALE EISLER

JULIE CAZZIN