I recently read an article in one of Canada's leading newspapers, suggesting that it's time to add more "risk" to your portfolio. I believe the point the author was trying to make was that it's time to add economically sensitive companies to your portfolio. With the economy getting better that's a good plan - except for the current price of the markets.I think that the average investor who takes this as a green light to jump into the market with both feet may be disappointed. As a died-in-the-wool value investor, I define "risk" as a permanent loss of capital - AKA - losing money. Minimizing "risk" is a function of prices paid for a security, whether it's a stock a bond or a house. So jumping into the market now, with little or no regard to prices paid, could result in a painful permanent loss of capital. With the market up 86% since the "bottom" on March 9, 2009 ( largest rally since 1955, source: Bloomberg ) equity prices are not exactly cheap. Dirt cheap stocks are now much harder to find - so risk levels (prices) are now much HIGHER then the past 18 months, but there are still pockets of value. As I have mentioned in other posts, going forward, I'll continue to sniff around areas like:
- Canadian Life/Property insurers - MFC, FFH
- US Banks - Citi, B of A, Wells Fargo - and some small US thrift banks
- US Business services
- Select North American oil/gas companies - one's that are out of favour due to high gas exposure
- Auto/truck parts
- Large cap US multinationals
- Emerging market industrials
Some of the areas listed above have perked up recently so before I jump in and add "risk" I'll be particularly sensitive to prices paid. After all, a well purchased stock is already half sold.
As an aside, many articles and investment advisors continuously recommend investors own Canadian Banks. I currently see little or no value (except for income only investors) in the Canadian banks. At 2x book and mid teen P/E's, they are definitely not screaming buys. I don't see a huge earnings tailwind to push the Canadian banks higher - at least for now.
Disclosure: Long WFC, BAC, C, MFC, FFH