We had a very important meeting in our office this week and I almost felt like I was back in University listening to a really bright professor. Kim Shannon, the President and Chief Investment Officer of Sionna Investment Management gave us a quick market history lesson and her views on why we have seen a sideways market for the last decade. Turns out it is a fairly regular phenomenon, if you look back over the past century and it is caused, in Ms. Shannon’s view, by human behaviour.
She had my attention. Her thesis holds that humans, ‘average investors’, are not very good historically at determining good value. It is in fact, their ‘human nature’ to get excited and pessimistic at the wrong time and as a result markets became significantly over or under valued based on common sentiment. This view is not new but the data she presented was certainly convincing in showing how this has played out consistently.
Think about recent market history; after a decade of above average returns in the 1990’s investors poured money into the markets at the top. Now we have had a decade of disappointing returns and investors are much less keen to put long-term dollars into financial assets. Every investment professional knows intuitively that there is a reverse correlation to market returns and mutual fund cash flows and yet this trend still continues– human nature.
Kim finished her chat with a fantastic example of how this has worked with a simple illustration of a well known Canadian stock. Thomson Reuters the preserve of Canada’s richest family could easily be the ‘poster child’ for why markets can tread water for periods of time. At the time of the last market peak in 2001, Thomson Reuters was earning 75 cents per share, was trading at $57 and had a price to earnings ratio of 76 times. The stock dividend was 69 cents or 1.2 % of the share price. At the end of 2011, the same company was earning $1.96 and the share price was $27.25 or a price to earnings ratio of 13.9 times. And the dividend was $1.24 or 4.6% of the share price.
Kind of defies logic that an entity could triple what they earn and you could buy it for half price. In 2001, investors had bid up the stock to the point where there was no value in owning the company. Today Thomson Reuters, based on any measure, is extremely cheap and all anybody wants to talk about is Greece. There are many stories like this in the financial markets and eventually we will take notice and markets will resume their historic upward historic march.
