Tye Bousada and Geoff MacDonald remember exactly what they were doing the last time the financial world collapsed around them. In September, 2008, they were two of three star mutual fund managers who’d left giant Trimark Financial Corp. to strike out on their own and form Toronto-based EdgePoint Wealth Management.
On Sept. 15, the day Lehman Brothers filed for bankruptcy in New York – a collapse that would send stock markets into a six-month tailspin and set off a global financial crisis – the trio started their long-planned 40-city roadshow for an initial public offering to try to raise investment capital. At nine that morning, Mr. Bousada and Patrick Farmer, who’s now EdgePoint’s CEO, went ahead with a presentation to a small group of investment advisers in London, Ont., and Mr. MacDonald did the same in Oshawa.
Then, as now – and many times in financial history – a massive crisis was about to cause widespread pain and dislocation. But it would also create huge opportunities.
EdgePoint had a fundamentally simple value-investing approach, focusing on solid, promising companies, rather than the entire economy or markets as a whole. “We believed capitalism would prevail, and things would slowly get back to normal for the economy and these businesses,” Mr. MacDonald recalled in an e-mail to The Globe and Mail.
If the companies could just get through the crunch, he said, “there would be significant money to be made.”
As things turned out, it was one of the best times ever to invest in stocks. When the IPO closed in November, 2008, EdgePoint’s publicly traded lead investor, Cymbria Corp., had raised $234-million. By the end of 2009, the firm had $450-million in assets under management. At the end of last year, after a decade of stellar returns in many of its funds, EdgePoint had $28.9-billion.
In many ways, however, the global coronavirus crisis of 2020 is much sharper, and more problematic, for investors. From September, 2008, to the bottom in March, 2009, the Standard & Poor’s 500 Index declined by 45 per cent. This time, the plunge has been smaller so far – about 33 per cent from a pre-crisis peak in February to a trough on March 23 – but it took just a month. Yes, the S&P 500 has recovered roughly half the lost ground since then, but the market still swings wildly almost every day.
ANNUAL RETURNS SINCE 1825
Just nine disastrous years of
20-per-cent-plus losses
2015
2011
2007
2005
1994
Stocks plunge more than 20% on Black Monday (Oct. 19), but market posts a gain on the year.
1993
1992
1987
2016
1984
2014
1978
2012
1970
2010
TOTAL PERCENTAGE RETURN IN THE
STANDARD & POOR’S 500 INDEX
OR EQUIVALENT BY YEAR
1960
2006
1956
2004
1948
1988
2000 - 2020
1947
1986
1900 - 1999
1923
1979
1825 - 1899
1916
1972
2019: The long bull market continues, with the S&P 500 up 28.9%, its biggest gain since 2013
2018
1912
1971
The dot-com
2000
1911
1968
bubble bursts
1990
1906
1965
1981
1902
1964
1977
1899
1959
1969
1896
1952
2017
1962
1895
1949
2009
U.S. stocks hit
1953
1894
1944
2003
bottom in July,
1946
1891
1926
1999
down 86 per
cent since before
1940
1889
1921
1998
the Crash
1939
1887
1919
1996
Stocks start
1934
1881
1918
1983
collapsing in
February as
2020
1932
1877
1905
1982
COVID-19 spreads
2001
1929
1875
1904
1976
2019
globally (YTD)
1973
1914
1874
1898
1967
2013
1966
1913
1872
1897
1963
1997
The Great
Crash in
1957
1903
1871
1892
1961
1995
October ushers
1941
1890
1870
1886
1951
1991
in the Great
n
Depression
1920
1887
1869
1878
1943
1989
1917
1883
1868
1864
1942
1985
1910
1882
1867
1858
1925
1980
U.S. stocks
1893
1876
1866
1855
1924
1975
finally regain
their pre-
1884
1861
1865
1850
1922
1955
Crash peak
Lehman
1873
1860
1859
1849
1915
1950
Brothers goes
2002
1854
1853
1856
1848
1909
1945
bankrupt and
triggers the
1974
1841
1851
1844
1847
1901
1938
1958
1954
global financial
1930
1837
1845
1842
1838
1900
1936
1935
1933
crisis
1907
1831
1835
1840
1834
1880
1927
1928
1885
2008
1857
1828
1833
1836
1832
1852
1908
1863
1879
1931
1937
1839
1825
1827
1826
1829
1846
1830
1843
1862
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
ANNUAL RETURNS SINCE 1825
Just nine disastrous years of
20-per-cent-plus losses
2015
2011
2007
2005
1994
Stocks plunge more than 20% on Black Monday (Oct. 19), but market posts a gain on the year.
1993
1992
1987
2016
1984
2014
1978
2012
1970
2010
TOTAL PERCENTAGE RETURN IN THE
STANDARD & POOR’S 500 INDEX
OR EQUIVALENT BY YEAR
1960
2006
1956
2004
1948
1988
2000 - 2020
1947
1986
1900 - 1999
1923
1979
1825 - 1899
1916
1972
2019: The long bull market continues, with the S&P 500 up 28.9%, its biggest gain since 2013
2018
1912
1971
The dot-com
2000
1911
1968
bubble bursts
1990
1906
1965
1981
1902
1964
1977
1899
1959
1969
1896
1952
2017
1962
1895
1949
2009
U.S. stocks hit
1953
1894
1944
2003
bottom in July,
1946
1891
1926
1999
down 86 per
cent since before
1940
1889
1921
1998
the Crash
1939
1887
1919
1996
Stocks start
1934
1881
1918
1983
collapsing in
February as
2020
1932
1877
1905
1982
COVID-19 spreads
2001
1929
1875
1904
1976
2019
globally (YTD)
1973
1914
1874
1898
1967
2013
1966
1913
1872
1897
1963
1997
The Great
Crash in
1957
1903
1871
1892
1961
1995
October ushers
1941
1890
1870
1886
1951
1991
in the Great
n
Depression
1920
1887
1869
1878
1943
1989
1917
1883
1868
1864
1942
1985
1910
1882
1867
1858
1925
1980
U.S. stocks
1893
1876
1866
1855
1924
1975
finally regain
1884
1861
1865
1850
1922
1955
their pre-
Crash peak
1873
1860
1859
1849
1915
1950
Lehman
Brothers goes
2002
1854
1853
1856
1848
1909
1945
bankrupt and
triggers the
1974
1841
1851
1844
1847
1901
1938
1958
1954
global financial
1930
1837
1845
1842
1838
1900
1936
1935
1933
crisis
1907
1831
1835
1840
1834
1880
1927
1928
1885
2008
1857
1828
1833
1836
1832
1852
1908
1863
1879
1931
1937
1839
1825
1827
1826
1829
1846
1830
1843
1862
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
ANNUAL RETURNS SINCE 1825
Just nine disastrous years of
20-per-cent-plus losses
2015
2011
2007
2005
1994
1993
Stocks plunge more than 20% on Black Monday (Oct. 19), but market posts a gain on the year.
1992
1987
2016
1984
2014
1978
2012
1970
2010
1960
2006
1956
2004
1948
1988
1947
1986
1923
1979
1916
1972
2018
1912
1971
The dot-com
2000
1911
1968
bubble bursts
1990
1906
1965
1981
1902
1964
1977
1899
1959
1969
1896
1952
2017
1962
1895
1949
2009
1953
1894
1944
2003
U.S. stocks hit
1946
1891
1926
1999
bottom in July,
down 86 per
2019: The long bull market continues, with the S&P 500 up 28.9%, its biggest gain since 2013
1940
1889
1921
1998
cent since before
the Crash
1939
1887
1919
1996
1934
1881
1918
1983
Stocks start
collapsing in
February as
2020
1932
1877
1905
1982
COVID-19 spreads
globally (YTD)
2001
1929
1875
1904
1976
2019
1973
1914
1874
1898
1967
2013
1966
1913
1872
1897
1963
1997
The Great
Crash in
October ushers
1957
1903
1871
1892
1961
1995
in the Great
Depression
1941
1890
1870
1886
1951
1991
1920
1887
1869
1878
1943
1989
TOTAL PERCENTAGE RETURN IN THE
STANDARD & POOR’S 500 INDEX
OR EQUIVALENT BY YEAR
1917
1883
1868
1864
1942
1985
1910
1882
1867
1858
1925
1980
2000 - 2020
1893
1876
1866
1855
1924
1975
U.S. stocks
1900 - 1999
finally regain
1884
1861
1865
1850
1922
1955
their pre-
Crash peak
1825 - 1899
1873
1860
1859
1849
1915
1950
2002
1854
1853
1856
1848
1909
1945
Lehman
Brothers goes
1974
1841
1851
1844
1847
1901
1938
1958
1954
bankrupt and
triggers the
1930
1837
1845
1842
1838
1900
1936
1935
1933
global financial
crisis
1907
1831
1835
1840
1834
1880
1927
1928
1885
2008
1857
1828
1833
1836
1832
1852
1908
1863
1879
1931
1937
1839
1825
1827
1826
1829
1846
1830
1843
1862
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
As for EdgePoint, it’s no longer a nimble start-up. The firm now has more than 300,000 mutual fund investors, and it serves the vast majority of them through 1,500 financial advisers employed by investment dealers. Mr. Bousada and Mr. MacDonald spend a lot of time communicating with those advisers and clients, urging them not to cash out during a panic.
In an e-mail to The Globe, Mr. Bousada said EdgePoint sticks to a sound basic strategy in good times and bad, and investors should “always try to live within a narrow emotional band no matter what is going on in the stock market.”
But he added that his firm keeps looking for opportunities in a crisis and has bought positions in eight companies over the past eight weeks (although it has followed them for years). “That’s a lot for us,” Mr. Bousada said. “We usually buy six in a year.”
Many analysts and managers believe there are a lot more bargains to be had. Even after the S&P’s recent comeback, North American stocks remain historically cheap, so why not start buying again right away?
Financial sage Burton Malkiel, a Princeton University economist and author of the 1973 investing classic A Random Walk Down Wall Street, published a widely cited opinion article in The Wall Street Journal this past week saying the cyclically adjusted price-to-earnings (CAPE) ratio for the S&P 500 – averaged over the past 10 years – remains 20-per-cent lower than its pre-crisis peak, and investing when the ratio is low almost always produces solid long-term returns.
That ratio has been near 20 for long periods going back to the 1880s, but surged to almost 35 just before the Great Crash of October, 1929, more than 45 just before the dot-com bust took hold in 2000, and 30 this past February. This past week, it was near 23.
Prof. Malkiel, who’s 87, has never had any use for professional money managers or individuals who try to pick specific stocks – they almost never beat the market. He has long argued in favour of low-cost, broadly based index funds, and in an e-mail to The Globe, he said individuals should buy “a little now, a little more when the market goes down another 10 per cent, a little more down another 10 per cent. No particular time schedule.” Year-to-year swings in stock market returns can be wide (see chart), but over several decades, indexes usually climb strongly.
The coronavirus crisis is also much different than the financial crisis in other fundamental respects. Like many strategists, Candice Bangsund, vice-president and portfolio manager, global asset allocation, with Montreal-based Fiera Capital, says the 2008–09 debacle was primarily a financial contagion that hit banks and other institutions hard, while most of the rest of the real economy kept going.
This time, she says, there was a global external shock not just to markets, but to almost every sector in every economy.
At some point, the crisis will ease, but Ms. Bangsund says markets are still far too tumultuous and uncertain for anyone to be making bold bets on a recovery. “We actually think we’re going to see a double bottom. We’re going to retest those March lows.”
Fiera has $160-billion in assets under management, and for the moment, according to Ms. Bangsund, the firm is staying “neutral across the board.” It hasn’t “sold into a panic,” she says, and has maintained its overall asset allocation between stocks, bonds, real assets and cash. Nor does it have any strong preferences among sectors or regions.
Ms. Bangsund says Fiera is looking for several more certain signs that markets and the economy are stabilizing. Those signs include peaks in the number of COVID-19 cases worldwide, governments lifting quarantine restrictions, and strong evidence of improving consumer and business psychology.
Even so, she says, “recovery is going to look more like a U-shape than the V-shape” some investors were hoping for.
The trouble is those clear signs often don’t emerge until a market recovery is well under way. In the meantime, there’s uncertainty. William J. Bernstein, a celebrated investor and financial historian in Portland, Ore., who was a practising neurologist for 25 years before shifting careers in the early 2000s, says it’s hugely difficult to stay cool during a panic.
“There’s the worst thing you can do, which is sell,” says Mr. Bernstein. “There’s the next best thing you can do, which is absolutely nothing. And then the third thing you can do, which for some people – and I emphasize the some – if they have the patience, the cash and the courage, and in that order, they can do some buying.”
Mr. Bernstein has written seven books about investing and financial history, including The Birth of Plenty and A Splendid Exchange. While trying to remain calm himself during the current crisis, he says the parallels to the Great Crash and the Great Depression are worrisome. U.S. stocks and the economy both just kept sinking in the 1930s – stocks declined by almost 90 per cent by 1932, with the unemployment rate climbing to more than 20 per cent for most of the early ’30s.
The speed of the coronavirus crisis alarms him. “You know, 10 million people out of work [in the U.S.] within a matter of weeks? That’s unprecedented,” he says.
Yet, Mr. Bernstein says there are reasons to hope for the best-case scenario. If effective treatments and a vaccine for the coronavirus emerge within several months, “the economy slowly starts to pick back up, and 12 months from now, we’re back to normal.”
Whatever happens, Mr. Bernstein says investors should always follow several classic rules. Your asset allocation is more important than your choice of specific stocks or bonds. Rebalance your portfolio regularly (although not constantly) to get back to your target asset allocation. Even once a year might be enough for some people.
Young investors with long time horizons can invest heavily in stocks for growth, but older investors should boost their weighting of bonds as they age.
Even before the latest crisis, however, Mr. Bernstein says some old investing notions had already become obsolete. The low interest rates and bond yields since the financial crisis will likely endure, he says. “People got used to the idea from 10 or 20 years ago that you could live off the interest rate of your fixed-income assets. It is no longer true, and it probably will never be true again. You consume fixed-income assets as you get older. That’s what they’re there for.”
Coming to grips with uncertainty is also daunting at any age, but in many ways, it’s the norm – even welcome. “Times of uncertainty create opportunity for investors,” says EdgePoint’s Mr. MacDonald. “When things are certain and we all see the same future, there’s no opportunity for outsized returns.”
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