Business journalist Peter Hadekel delves into Fraser's successful and counterintuitive strategies in Picking Winners.
In the introductory chapter to Picking Winners: The Inside Story From Scott Fraser, Co-Founder of the Legendary Investment Firm, Jarislowsky Fraser, former Montreal Gazette columnist Peter Hadekel explains how Fraser’s long-term approach informed his attitude in the early months of the coronavirus crisis.
In mid-February 2020, Scott Fraser and his wife, Rachel, arrived at Longboat Key on the west coast of Florida to begin a six-week vacation. For Fraser, a ninety-one-year-old investment adviser from Montreal, it was an opportunity to relax in the sun and reflect on another outstanding year in the stock market. His portfolios had once again climbed by close to 20 per cent in the year just past, and his annual average return since 1990 remained over 19 per cent.
There were no clouds on the horizon. The eleven-year bull market in stocks was intact and thriving. The Dow Jones Industrial Average was making record highs, inflation and unemployment were low, banks were well capitalized, and there were few apparent financial risks. This had become the longest bull market in history, and there was no reason to think it wouldn’t continue.
Some analysts warned of a potential correction, but Fraser generally didn’t pay much attention to stock-market prognosticators. What they had to say didn’t apply to his time-tested strategy of buying quality stocks for the long term and holding them through ups and downs.
Sure, there were news reports about a virus in China that had struck the city of Wuhan, a large commercial centre with a population of eleven million. The virus first surfaced in December 2019, when it had alarmed some Chinese medical officials, but the government kept a tight lid on the story for several weeks, even sanctioning those who tried to speak publicly about it.
When the outside world first heard about the new coronavirus, and the COVID-19 disease associated with it, reports stressed that 80 per cent of cases were either mild or asymptomatic. Deaths were largely confined to Hubei province in China. It was another in a string of viruses that had emerged from Asia in recent times, and none of those prior virus scares had proved to be global threats. So in those early days, while it was on the radar screens of investors, the new coronavirus hardly looked like a major threat to public health or financial stability.
Slowly, the truth began to emerge. One result of China’s inaction was that the disease spread rapidly among the local population and among many visitors to the city from places like the United States, Italy, Japan, South Korea, and Iran. The Chinese government finally acknowledged the scale of the problem when thousands fell sick: it had little choice but to order a lockdown of Wuhan and a travel ban to and from the city.
By this time, investors had begun to see COVID-19 as an opportunity. The Dow Jones Industrial Average, which had reached its all-time high of 29,568 on February 12, began to slide. In the early weeks of the market correction, the virus served as a way to knock down prices of expensive stocks, providing a cheaper entry point for some buyers. Then the market decline gained momentum, exacerbated by collapsing oil prices. A dispute between Russia and Saudi Arabia over how much oil should be pumped into the marketplace had come at the worst possible time.
Soon stock prices were in free fall: by March 23, the Dow index had fallen all the way to 18,591, an astonishing decline of 37 per cent from the top, with new complications to consider. There was not only fear and panic about what was now a global pandemic but also widespread concern about a massive disruption to the global economy as countries tried to contain the virus. Workers were ordered to stay home; businesses were shuttered; air travel plummeted; borders were closed.
Governments pumped huge amounts of emergency funding into their economies to try to cushion these blows, but it was apparent that the economic impact of the disease would be severe. Bankruptcies, loan defaults, and massive unemployment loomed on the horizon. A global recession appeared inevitable, and who knew how long it would last? A vaccine to fight the virus was unlikely for another twelve to eighteen months, and no anti-viral treatments for COVID-19 had yet been approved by authorities.
In the circumstances, investor psychology was volatile in the extreme. Panic about the pandemic and confusion over how governments would respond led many to react in fear. In the absence of certainty, many investors sold stocks and fled to cash, but Scott Fraser wasn’t one of them. “When I first saw the crack in the market, I said to myself that I have seen this before. I will just pull in my horns and sit tight,” he remembers. “At the end of December, we had a lovely portfolio. Nothing had changed in February as far as the fundamentals were concerned.”
Fraser had spent a lifetime ignoring the “noise” that markets can make during volatile periods — the short-term swings of fear and greed that could cloud rational decision-making. History had proven him right. In the last prolonged bout of market panic — the financial crisis of 2008–09 — Fraser’s portfolio absorbed a short-term hit of approximately 25 per cent on paper but bounced right back in the following years as markets climbed to new heights. He had been able to profit fully from that recovery precisely because he had remained fully invested and had not succumbed to fears about market gyrations. “In 2008, I could see that some banks were probably going to fail,” he recalls. “And I could see that this was going to lead countries to fail, like Iceland and Ireland. But I also could see that there was going to be an end to it if I just stayed patient.”
It takes a lot of courage to stay invested when prices are plummeting; Fraser recognizes the nature of the problem that investors face in such circumstances. If they prefer to get out of the market for a period of time, at what point do they choose to exit, or to get back in? With the hindsight afforded by academic research, we know that most investors get these decisions wrong.
They can’t identify the correct times to sell and buy. They might get one of the two right, but they miss out on opportunities when they are not in the game. “All my life, when there’s been a crack in the market, I’ve stayed in,” Fraser says. “That happened when the tech bubble burst in 2002. Stay the course.”
Just how tricky it is to time the market is apparent when you consider what happened during the wild week of March 23, 2020. After falling into bear market territory and declining some 37 per cent below the market top, stocks suddenly rallied for three consecutive days on news of a $2-trillion stimulus package in the United States. On March 26, the Dow industrials finished the day ahead by 6.4 per cent, ending a bear market after just eleven trading days. The Dow industrials were still down 21 per cent on the year, even after gaining 21 per cent in the three-day rally. It was enough to give an investor whiplash and showed the futility of trying to guess how stocks might behave.
“People were shocked that the market could go down so fast,” recalls Maxim Saint-Amant Lamy, who works with Fraser at Landry Investment Management in Montreal. “It had never declined so fast from an all-time high.” On Black Monday in October 1987, the market fell 22.6 per cent in one day, but the prior all-time high had been recorded in August, a couple of months before. Similarly, the Great Crash in October 1929 was preceded by a market high in the preceding August. Adding to the panic this time was the fact that markets went almost directly from a new high to a complete free fall, without much in the way of intervening declines.
Changes in the nature of financial products contributed to the speed of the quick drop. Exchange-traded funds (ETFs), which mimic the performance of indexes like the S&P 500, were a major force in the market plunge of 2020. “When people wanted to sell their holdings, the easiest way was to sell an ETF,” observes Saint-Amant Lamy.
“That meant the whole basket of stocks went down. In previous times, people used to be able to take refuge in defensive stocks like utilities that weren’t volatile and paid a good dividend. This didn’t happen because the way most people reacted was to sell the whole index, utilities included. Everything went down at the same time, and there was no place to hide.”
Fraser’s team was busy telling clients not to join the stampede to the exits. “We tell our clients, yes, part of our job is protecting capital,” says Saint-Amant Lamy.
“But the best way to do that is staying invested. If you shelter in cash, there is a big chance of missing the rebound, and the loss is permanent. In 2008 and 2009, we saw many investors lose thirty, forty, or fifty per cent and then do panic selling. Once they had felt so much pain, they didn’t want to get back in, so they missed out on the rebound.”
Others tried to “call the bottom” in stocks, betting that the market had reached its turnaround point, but that’s very hard to do. There are so many false bottoms and false rallies in these situations.
“This crisis is the same as 2008,” Fraser believes. “Instead of a banking crisis, we have a public health crisis.” You just need some patience to wait it out, he says. If you are fortunate to have enough for retirement, your time horizon for investment returns can go from a few years to a decade or more, and you can be confident that at some point, the market will come back.
By early April, markets were already factoring in the cost of a recession, so the question for many investors became whether economic activity would recover quickly or remain lower for longer. Stocks continued to shrug off the grim death tolls piling up around the globe, moving ever so steadily upward again and underlining the fact that the place to be was in the market, not out of it. While share prices were bound to experience some volatile ups and downs through 2020 and 2021 as the economy adjusted to life with the virus, the gloom that had descended on markets already seemed to be lifting.
In Fraser’s view, the most important thing is to own stock in good companies that are well managed and solidly financed. Of course they can be stressed by the upheaval, but they tend to emerge in relatively good shape compared to most.
If you were Scott Fraser’s client, you could be confident in one thing: he’d spent an entire career building an investment approach that identified high-quality stocks that would reward investors handsomely. Such stocks are better able than most to weather a financial storm. While the health crisis of 2020 will have a profound impact on reshaping economies around the globe, the old rules for picking winners will still apply.
Excerpted with permission from Picking Winners: The Inside Story From Scott Fraser, Co-Founder of the Legendary Investment Firm, Jarislowsky Fraser, by Peter Hadekel (Barlow Books), now available at amazon.ca.
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