Making sense of the markets this week: September 28

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Is beating the market a thing of the past?

There are many reasons why it gets harder and harder to beat the market. Even for the likes of Berkshire Hathaway’s Warren Buffett. 

That’s the conclusion of “The Incredible Shrinking Alpha,” newly updated in August 2020 by Larry Swedroe, chief research officer for St. Louis, Mo.-based  wealth management firm Buckingham Wealth Partners, and Andrew Berkin, head of research at Bridgeway Capital, a wealth management firm based in Houston. 

S&P Dow Jones Indices have studied active managers for many years. Last year, they noted that after 10 years, 85% of large fund managers underperform their benchmark (using the S&P 500), and after 15 years, that underperformance reaches 92% of managers. 

Why has it become tougher each year and decade to beat that passive benchmark?

1. The competition is getting tougher. There are so many active managers evaluating and pricing the individual stocks. It’s almost impossible to get an informational advantage. 
2. With more individual investors moving to passive investment products such as ETFs and index funds, there’s less “dumb money” for institutional investors to exploit. 

This chart shows how Warren Buffett, widely considered to be the one of the world’s greatest investors, has fared versus the market from January of 2001 (iShares IVV inception date) to the end of August 2020:

I had the pleasure of chatting with Larry Swedroe, and he offered that the continued move to passive investing is great for the typical investor who discovers the cost effectiveness of passive funds and ETFs. Fees have fallen in the ETF sector, and that will continue to put price pressure on mutual funds and on advisory firms. They have to compete with the lower-fee options. 

Swedroe suggests that the move away from active management will continue to remove the poor managers from the industry. What we will be left with is a smaller number of active managers, but it will be a smarter pool of active managers. 

“Given the size of the industry, we could remove another 90% of those managers and still have enough active managers to effectively price the stocks,” Swedroe says. “But we don’t want everyone to become passive, because through their price discovery efforts active managers keep markets efficient.”

I have a copy of The Incredible Shrinking Alpha. I’ll report back in this space, and I’ll review that book on my site. 

The average Canadian stock “outperforms” the average U.S. stock

In The Globe and Mail, Tim Shufelt notes… 

“It might not feel like it, but the average Canadian stock is actually outperforming its U.S. counterpart so far in 2020. The widespread impression of U.S. dominance in pandemic-era markets is largely rooted in the stratospheric rise of a few technology and internet giants. But for the vast majority of publicly traded U.S. companies, 2020 has been nowhere near as favourable. The average S&P 500 index company is down by roughly 8%year to date.

“In Canada, on the other hand, the overall market returns have been much more evenly spread out. The average stock in the S&P/TSX Composite Index, regardless of size, is down by just less than 5%.” 

More breadth means a more healthy market. That is, there is more support or more contribution to returns from more companies and more sectors. From that Globe article: 

“Five years ago, the five largest companies in the S&P 500 accounted for about 10% of the total market capitalization of the index. By early September, that weighting rose to 25%.”

That might be a sign that the Canadian market might hold up a little better. The U.S. market may rise and fall based on the merits of those tech giants. 

In fact, in the recent stock market selloff that began on Sept. 2, U.S. stocks are down over 9% while Canadian stocks are down just 4.5% to end of trade Wednesday of this week. 

The Canadian stock market is known for not being very diversified. Our stock market is dominated by financial stocks and energy-related stock names. But the suggestion from that article is that the Canadian market is now more diversified than the tech-heavy U.S. market. 

All said, we are back to the theme of global diversification within your portfolio. The U.S. stock market is known to fill in many of the portfolio gaps for Canadian investors; that song remains the same. Now, perhaps, it’s possible that the Canadian stocks might pick up the slack for US stocks. 

Investing in movie theatres: That’s not the ticket

Mulan is a flop. Even in China, where COVID is more under control, Mulan could not fill seats. This Disney release was supposed to provide a post-pandemic jumpstart to the film and movie theatre industry, but moviegoers are just not going. (You can always sit at home and watch Mulan by way of a Disney+ subscription, plus  $34.99 US.)

On Sept. 11, I conducted an unofficial Twitter poll that predicted tough times for the movie industry… 

Mulan is a $200-million US production that has only brought in some $57 million US. Survey says: Not many want to sit in an enclosed theatre during a pandemic. Go figure. 

Disney decided to skip the U.S. theatre release altogether. Perhaps it’s just not worth the effort: In the U.S., only 65% to 75% of movie theatres are open at limited capacity, with major markets like New York, Los Angeles, and San Francisco still closed due to the global pandemic. 

And while the global sci-fi “hit” Tenet has solid numbers globally, the seats are largely empty in North America. In its opening weekend, Tenet pulled $20.2 million in the U.S. For comparison, let’s look at the U.S. opening weekend revenues for Tenet director Christopher Nolan’s other genre films: Inception grossed $62.7 million, Dunkirk $50.5 million, and Interstellar $47.5 million. It’s expected that Tenet will not turn a profit in the end. 

This is playing out like a disaster movie. Canadian movie theatre chain Cineplex (CGX) stock price is down about 77% from the beginning of the pandemic. The pandemic also spelled the end for the takeover of Cineplex by UK-based Cineworld. Cineworld put in an offer for Cineplex in December of 2019. After the pandemic hit, Cineworld pulled the offer and they are now headed for court. 

Nike: the stock that just does it!

Full disclosure, I own Nike stock. So, yes, I am a little excited about the recent performance of Nike. This week, Nike stock certainly did go for a run. Let’s call it a sprint. 

Here’s a headline that Nike investors enjoyed reading… 

Nike runs to all time highs as results dazzle 

After announcing earnings Nike stock went up about 13%. The stock price came down to earth slightly during the day on Wednesday, settling with a one-day gain of nearly 9%. 

Eighties kids will recall the sensation created by Nike’s collaboration with basketball legend Michael Jordan, by way of the iconic Air Jordan shoe. Nike has become a global athletic shoe and apparel powerhouse, and one of the strongest brands on the planet (a respectable number 40, to be precise). 

Let’s have a look at that brand list. Imagine investing in the top four companies—Amazon, Google, Apple and Microsoft—even just two or three years ago. These incredible companies have trounced the market in returns over the last decade. I see the relationship between strong brands and company and stock performance as no coincidence.

Brand is one of the key reasons why I bought Apple back in 2014 as a personal U.S. stock pick. Strong brands can lead to a loyal customer base. Those loyal consumers can become brand ambassadors. 

Of course, the tagline or brand positioning (slogan) for Nike is Just Do It. As a former ad guy, I’d suggest it is one of the best taglines in the history of modern advertising. 

Nike’s performance is part of a larger pandemic trend. In the stay-at-home and work-from-home “new normal,” folks have discovered walking, running, hiking, cycling, kayaking and SUP (stand up boarding) and more. 

MoneySense columnist Bryan Borzykowski looked into the Peloton phenomenon in January, when this stationary bike manufacturer was already on the move. Peloton stock is up over 230% year-to-date. 

For the Nike stock, things are more than shaping up. Deutsche Bank moved to a Buy rating, Susquehanna lifted its price target to $160 from $150. Perhaps the run will continue. On Thursday, Nike was trading in the area of $127 US per share. 

Nike stock: Just own it? 

Tweet of the week

You may be surprised to see the credit card and payment giants Visa and Mastercard on this list of top-performing stocks from the last decade. Can they continue with the outperformance? There is incredible disruption in the payment space. But don’t we all hold one of those cards? 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

Twitter Website