Full Circle and a Time to Remember the Past

Stephen Bishop, Investment Advisor

August 2024

When I started in this business in 1985, I was what I would refer to today as a kid. But at the time I was a young and energetic fellow who was given a career opportunity that was unique, interesting and that had the prospect of being financially beneficial compared to the other career opportunities of the time.

It was a much simpler time in this industry. There were no complicated investment products. No catchy marketing phrases like “Wealth Management”, “Financial Planning”, “Total Wealth Planning” and so on. Mutual fund offerings were not even on the list of things we offered. The “cookie cutter” investment offerings of today that are flogged to the masses by the investment industry did not exist. Things were straightforward and the product offerings we provided to our clients were simple and fully transparent regarding what we did and what one owned.

I was hired by one of the old Canadian brokerage firms. A firm called McLeod Young & Weir. A well-respected brokerage firm at the time who was in the “Stock and Bond” business. This was before the time in Canada when the government allowed the “Big 5” Canadian banks to break from the traditional separation of the “four pillars” of the financial services industry. And subsequently take over the lot, thus transforming the countries financial services into what I often refer to as a “cartel”.

When this happened, the old school traditional brokerage firm I worked with was bought and taken over by one of the “Big 5” banks. At the time it was not much different than before. Aside from the name on the sign changing to blend the former firm’s name with the bank’s name. This happened with all the major brokerage houses in Canada that were bought by the major “Big 5” banks.

However, shortly after things started to change and the consolidation of the former four pillars of financial services—banking, brokerage, insurance and trust—began to integrate into these massive financial institutions. For regulatory reasons, these four industries were and still are required to be segregated and operate as separate entities. However, they are all now under the umbrella of one financial institution with the “Bank” as the “Boss” of all.

As time passed the historical separation of bank, brokerage, trust and insurance faded away. Today in Canada we are in a world of what I would call “monopolies” for financial services. These Institutions all want a bigger piece of the industry and the “cross selling” of their internal group of financial services is the focus.

Over the past 40 years, these financial “power houses” bought up more and more smaller companies within the four pillars: more insurance companies, banks, trust companies, brokerages and mutual fund companies.

They continued to consolidate their back-office operations to reduce their costs, and continued to develop more product offerings to sell to their “captured” audience of customers.

As time passed, these institutions developed platforms and product offerings to simplify and streamline their financial service offerings into “cookie cutter” models that they could offer the masses, enabling the most efficient way to offer investment products in a “one size fits all” style allowing for maximum profitability for the “Banks”.

These interconnected institutions developed “sales forces” to market and pushed these platforms and the industry grew.

Over the past 40 years as the interest rates declined from the highest levels in history to the pandemic lowest levels in history, those investors who were originally very risk adverse and only sought guaranteed interest on their invested capital slowly moved more and more out of the risk off assets and into “risk assets” (the stock markets). This, for the purpose of trying to maintain the previous rates of return they previously enjoyed from bonds and guaranteed deposits.

Now 40 years is a long time, and the transition was slow. Also, over this period more young people grew up and entered the workforce and started saving. As interest rates trended lower, more traditional risk off investments flowed into risk on investments. Younger investors never knew what it was like to get a guaranteed 10% return on a bond or deposit. And as more money shifted from one asset class to the markets, the rates of return provided ample overall returns to justify the risks.

The phrase “you have to be in this for the long term” and statements like “market corrections happen, don’t worry it will come back” and so on became the norm, and the investing public came to know no different.

Because of the “mass” marketing and adoption by investors of the past 40-year cycles and the overall performance of risk assets over that time period, investors have become complacent.

Most investors do not even know what they own. Most investors do not understand economics, government interest rate policies, stock market valuations, excessive government spending and debt, and a long list of things one should understand before investing their money in anything.

The past 15 years has made this complacency even worse.

Why the past 15 years? Because that’s how long it’s been since we came out of the last “meaningful market correction”. That period from 2007 to 2009, which is today referred to as “The Great Financial Crisis”, was the last time stock markets corrected by more than 50%.

For those of us who lived through that period, we understand how painful that could have been if one had most of their investments in “Equity Investments”. That includes individual stocks, equity mutual funds and ETFs.

For many, they have either forgotten that stock markets go down as well as up. Or they were not old enough at the time to have investments.

Another point on the “demographic” of the age of today’s investors; let’s not forget the age demographic of those now working in the financial services industry.

This includes all employees of banks and brokerages. This includes those individuals in the research departments, trading desks, working at pension funds, working at mutual fund companies, the salespeople at the banks flogging the mutual fund products, insurance agents and last but not least, those providing brokerage services the same as I do.

This is an important fact. If a large number of individuals in the financial services industry today providing investment advice were still in middle school or high school during the last market correction in 2007 to 2009, what should one expect these people to think like when it comes to investing, how they are recommending one should invest and their interpretation of the phrase “you have to be in this for the long term?” What is their understanding of “risk?”

I know different because I lived and was working in this industry through every market correction since my first experience to this unpleasantry in 1987.

I can assure you markets go down a lot faster than they go up. And one needs to understand this and invest their hard-earned savings accordingly.

Anyone who deals with me knows I am risk adverse. Possibly too much at times. However, I understand personally what it’s like to have your life savings cut in half in a typical and inevitable market correction, then wait to get back to even again afterwards. For those who have not experienced this, I can assure you that it is not much fun.

Now let’s fast forward to today and what I see happening and how I expect this to play out.

Firstly, recall that the stock markets have not had a material correction for the past 15 years. And through the past 15 years we have had governments around the world implement artificially low-interest rate policies, which in turn forced more and more people out of guaranteed interest-bearing positions toward stock markets and equity biased mutual funds and ETFs. Then we had the pandemic where governments took those all-ready low interest rates and dropped them to “zero”, thus fueling an unintended consequence of extreme speculation. When the cost to borrow money is zero or close to it, people go out and borrow money to buy things and to invest in the markets. This fuelled the real estate boom and bubble of the past four years. It also fuelled extreme speculation in the stock markets. If one can borrow money at 1 or 2% and buy stocks that pay a 4% dividend or buy technology stocks that have the potential for high growth, they will do it. Big brokerages and institutions do this. People do this. Free money fuels speculation in assets, and that’s what happened.

From a “valuation” perspective, the U.S. stock markets today, as well as many global stock markets are currently trading at the “Highest Valuation Levels” in history.

Higher than prior to the 1929 market crash. Higher than the 1987 market crash. Higher than the 2000 - 2003 “Dot Com Bubble” market correction. Higher than the 2007 - 2009 market correction.

Yes, valuations of stocks generally are at the highest levels in history and from these levels the potential upside in stocks or equity mutual funds and ETFs is limited and the downside is likely a minimum of 40% lower if not 50% to 70% lower.

Ask me how low or how bad it can get, and I must answer I don’t know. Because the governments took over the free markets and every time there has been a problem since 2009, the governments create new money out of thin air and step in and bail everything out. However, the time comes when the end of the road arrives, and I expect this may be one of those moments.

Personally, I know enough about these things to take the position that I want to preserve the savings I have. At my age I cannot afford to watch my savings decline by 40% or more. Do I feel there will be opportunities ahead. Yes. Lots of them for those with the cash to invest. But not for those who have their investments drop 50% and must wait for them to recover.

So, knowing all of what I know, why would I want to participate when I can take my money off the table and invest in short-term guaranteed products that pay me interest while I wait. And then as opportunities present themselves, start redeploying some of that cash when things are cheap.

Most in this industry will not do what I do because they don’t know enough about what’s going on, as well as they only provide the cookie cutter models of investments and “sell” their firms’ in house products.

When I think back over the past 39 years I have been in this business, the fundamental aspects of investing have not changed. There are the basic asset classes that one can invest in.

Stocks, bonds, real assets such as real estate, land, commodities, precious metals and then cash.

Everything else is a derivative of these (futures contracts and option contracts) or a mutual fund made up of these four asset classes.

But fundamentally there are only so many things that the financial services industry has as investment options.

My preference for investing is to own these asset classes in their real form. I have found that the endless issuance of complicated investment products and mutual funds in this industry are no longer “transparent” enough for me to understand regarding what these funds own. And if I can’t understand them then, I’m not going to own them.

I feel it’s important today for everyone to know exactly what they own, how it works and what the risks are (if any) in owning them.

“Hope” is not an investment strategy and today one needs to understand this.

I feel it’s important for investors to have full transparency of the same as well as the cost of what they pay for professional investment services.

It’s interesting to me that after 40 years of investing that I have come full circle back to where I started. Providing the same investment products and on a platform that is simple, transparent and one where I know exactly what I own so I can manage my risks of investing and have more control over my outcome.

Thanks for reading.

Stephen B. Bishop