Current Portfolio-13 Year Track Record

 

Sacola                   182%

TSX                           76%

DJIA                          97%

S&P 500                   107%

Past trades total 29 wins and 3 losses with an average gain of 34%. The average holding period was 2.3 years.

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Thursday
Jun152017

It was between 1929 and 1932 when depression slaughtered the stock markets and real estate.  Back then the economy was based on the rural segment and the stock market.   The real estate collapse was mostly through the prairies of North America where most people lived in the countryside and in small towns.  It was this financial meltdown that changed North American life.  People began the exodus from the farm to the cities. 

In the 1920’s the New York Stock Exchange was a gambling casino.  Like real-estate today, you could buy shares with 10% down.  Investors were required to keep a cash-to-margin ratio of 90:10.  This worked well until August 1929 when the collapse began.  Investors did not have the cash to maintain this ratio.  This caused forced selling which drove the stock markets even lower as it fed upon itself.  To make matters worse, the Federal Reserve pulled money out of the financial system bringing real-estate down in the process.  This made it impossible to borrow, so prices for everything collapsed. 

Between August 1929 and May 1932 the Dow Jones Industrial Average lost 89.9%.  This drop has been repeated only once since.  It was when the NASDAQ dropped 89% during the-hi tech implosion in 2000.  

It is so obvious that Canadian house prices are in the stratosphere. They bear no relationship to family income. For years prices have soared faster than wages and inflation.  At the same time families have piled up personalized debt to record levels to match these house gains.  The market is now changing as sales have peaked and are down double digits in many of the hot markets today.  Falling sales result in price drops leading us to believe prices will begin to decline by late summer, if they are not already.  It will be amazing how many potential buyers will disappear and how many homes will go up for sale. 

Stock Markets are based on profits.  Nothing else!  Because of this, stock markets are the second most expensive on record.  They are up slightly from two years ago while the markets are up over 10%.  The Dow Jones Industrial Average is currently trading at 20.5 times earnings.  The 97 year history of the index is between 13 times (set mostly last century) to this century’s average of 15 times earnings. 

In order for homes prices to return to their norms, prices must drop between 20% and 40%, depending on the location.  Stock markets face a potential decline of 25%.  The danger today is if the stock market and house prices decline at the same time.  If this takes place the economy will contract. You will want income (dividends) and to maintain a cash reserve that you can use to take advantage of the deals that will be out there. 

History has shown that when the average person is buying the same thing and getting rich at it, all the wealth gets taken away at some point rather quickly.  Even worse, it takes years to recover.  Just a few samples of this, the Tulip Bulb craze, American railway bonds in the 18th century, the Great Depression, the hi tech during the nineties, and the Financial Crisis of 2007-2008.

Both corporate and household income do not justify current prices.  Real-estate and stocks markets need to clean themselves of the rampant speculation taking place. This will occur. It is a given.  Let’s just cross out fingers both do not occur at once.