Fashionable Stocks and the World of Investment

This post by Alain Robitaille has been excerpted from a letter of Le Groupe Robitaille at Desjardins.

Writing this quarterly letter is a little like looking for potential investments. Sometimes you put in a lot of effort but ideas are hard to come by, and other times ideas pop up spontaneously!

One nice Saturday morning (this spring you can practically guess the date!), while reading the Wall Street Journal, I came across two interesting articles by the journalist Jason Zweig, author of the “The Intelligent Investor” column, entitled: “Quantitative Investing: a Crisis Waiting to Happen,” published on May 5, 2017, and “When Researchers and Investors Walk Into a Bar, the Investors Get Hammered,” published on May 12. This journalist says – correctly, in my opinion – that in the world of investment, fashionable stocks attract a lot of money quickly, but often have no scientific basis other than very short-term statistical trends, a model investment firms tend to exploit with heavy marketing.

Index funds are a good example. According to John C. Bogle, the inventor of these funds, the main goal of these products is to be able to buy, at the lowest possible price, an investment that replicates a given market, and to hold it. The markets chosen at the outset were global indexes like the S&P 500, composed of the 500 largest U.S. companies, or the S&P/TSX 300, comprising the 300 biggest Canadian companies. I think they should have stuck to that. Of course, the first to come up with the idea dominates the market, but will be quickly copied by other firms that “innovate.” Because in marketing, exactly copying an innovator doesn’t work very well. The wheel turns from one innovation to the next until the original idea, which, I remind you, was to invest for the very long term at low cost, is completely distorted.

You can even invest in computer traded products (quantitative models called “smart beta”), which are supposed to beat the markets while being less volatile and while trying to replicate certain “models,” like a fund that invests in the 250 companies that are most supportive of gender equality in the workplace (such a fund actually exists).

That’s an extreme example of a product created to attract investors by leveraging marketing trends and concepts. Incredibly, these products are traded in portfolios by managers who, instead of buying stocks directly, will instead buy and sell increasingly sophisticated funds for their clients, and bill the management fees themselves. These management fees and this trend of buying and selling regularly completely distort the original idea, which was to hold these investments for the long term and at low cost. What’s more, they add an intermediary!

According to Jason Zweig, the famous smart beta funds are so popular that they attract too much money, which propels the “low volatility” stocks they trade to high levels, making these products riskier than expected.

On a lighter note, when Fanie and Josée note that the word “fashionable” applies to a stock, they worry, because they’ve known for a long time that it’s impossible for me to follow it… In fact, Fanie even invented a term to describe me: I’m “colour-blind about fashion.” Although Fanie is referring to clothes or decoration in characterizing me that way, I have to say that sometimes you have to be colour-blind when investing in the stock market. Don’t look for what’s new, don’t look for what’s in fashion: that’s not necessary to be a successful investor.

Warren Buffett is another fashionable subject when it comes to the stock market. Recently, a client transferred to us a portfolio that he had with a competitor who claimed to invest according to the principles of this great investor. However, this manager made 87 trades in nine months, in addition to buying on margin… I might not know everything about Warren Buffett’s style, but I’m sure this way of investing has nothing to do with Buffet’s management style…

“A market is made of human beings. Some are patient and prudent; others trade as if the world will end in the next half-hour.” —Jason Zweig

Disclaimer: The results shown are before management fees. This data reflects past performance and is not indicative of future returns. This document may contain statistical data cited from third-party sources believed to be reliable, but Desjardins Securities does not represent that any such third-party statistical information is accurate or complete, and it should not be relied upon as such. Alain Robitaille and Fanie Ouellet are registered as portfolio managers with self-regulating organizations. They are authorized under IIROC Rule 1300 to make investment decisions and to give advice on securities for managed accounts. With the exception of Alain Robitaille and Fanie Ouellet, no member of Groupe Alain Robitaille may exercise discretionary authority with respect to a client’s account or approve discretionary orders for a managed account, or participate in the formulation of investment decisions made on behalf of or advice given with regard to a managed account. Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this document and all other companies and securities mentioned in this document that are covered by such advisor. It is possible that Desjardins Securities has previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Desjardins Wealth Management Securities is a trade name used by Desjardins Securities Inc. Desjardins Securities Inc. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).