Wednesday, April 15, 2009

Breakfast with Michael Ignatieff

This morning [Apr 15] we attended a breakfast meeting with Michael Ignatieff, the Liberal leader of the opposition. One of his comments related to Canada’s emerging leadership in the field of bank regulations. He felt Canada should be aggressively showing leadership, trying to help other nations regulate their banks more like Canada regulates our banks. At this juncture of the worlds banking crisis, Canada has a lot to be proud of.

What beautiful irony! We remember a time when Canadian banks were scrambling to merge with each other. Bank presidents told us all that Canadian banks needed to merge so they could become more competitive internationally. They thought that bigger would be better. By world standards, ‘the big five’ Canadian banks were too small. The government of that day decided not to allow further mergers. And today, it appears that Canada’s small banks are emerging as the best banks in the world. Maybe the competitive edge comes from smaller, not bigger.

We wonder what the leader of the opposition will say when today’s government is asked to consider the wedding of two of Canada’s biggest energy companies, Petro-Canada and Suncor. The presidents of these oil giants tell us they need to merge to become more competitive internationally. They too think bigger is better.

In a time when America’s biggest auto manufacturers, banks, mortgage companies, insurance companies and stock brokers have all collapsed, some still believe that bigger is better. When will they learn that small and flexible is better? Small, lean and efficient is better.

Don’t get caught thinking big.

We remember the late 1990s mutual funds boom. Salesman/planners used to tell their customers that they should own the biggest mutual funds with longest term track records. In other words, the average investors’ advisors were telling them bigger is better. And now, ten years later, we can look at the performance of those equity mutual funds: 10 year, 5 year, 4-3-2-1 year performance: all bad. Down 40% in the past year alone! Bigger is not better.

The Ontario Teachers’ Pension Plan is Canada’s biggest private pool of money. The Financial Post [Apr 2, 09] reported that they lost $21.1 billion in 2008. Six moths earlier they had reported a $12.7 billion short fall in funding. It looks like there might not be enough money to pay Ontario’s teachers’ pensions. It is very difficult to manage large pools of money. Bigger is not better.

In his book, Beyond The Bull, Ken Norquay explains how important it is to understand how other investors behave in the financial world. By adapting to how they think, we can make better decisions for our own investments. And right now we know that we should not do what the big guys are doing.

That’s the approach CastleMoore takes: small and flexible beats big and illiquid. There were times in 2008 when CastleMoore clients were completely out of the stock market. The biggest pools of investments can’t do that. They’re too big. It’s their selling that drives the stock market down. In the face of really big selling, who can buy? Who would buy?

Small investors should act like small investors; their flexibility is their edge.

Ken Norquay, CMT
Chief Investment Strategist,
CastleMoore Inc.
“Buy, Hold and Know When to Sell.”

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