A time for recuperating

As many of you have likely experienced this year, the equity markets have not been a kind and placid presence this year. Although most of the indices, including the DJIA and the TSX, are up a moderate percentage, it's not clear that investing in the markets was any better than socking your entire portfolio into a high interest savings account. In fact, for all the vaunted housing bubble talk, at least in the Canadian market there have been no major price declines and in some markets, including Vancouver, it still would have made a good momentum-style investment to be in real estate. However, real estate being a much longer term investment, with lower liquidity than stocks, I don't know how feasible it would have been to try to capture that move, when US markets have begun to feel the pinch and the possibility exists that the malaise will shift to Canada.

For me, it's been a lull year in total. Although I saw some fair early gains, I'm now considering this year a wash in my mind. One of the major stories this year was energy. Obviously the big news in energy investing is the giant dive the Amaranth hedge fund took based on big futures bets on natural gas -- the losses are purportedly around six billion, larger even than the LTCM meltdown. That said, energy in general has retreated significantly in the past month and it's become clear to me that energy stocks were this year's version of "Internet stocks". I avoided internet plays even during the boom year of 1999 when I started really paying attention to the market, because they never quite seemed legitimate. Somehow, oil stocks and their attendant hype did not ring the same BS sensors, and I've lost a fair chunk of money trying to engage in oil investments this year, after the hype had reached monster levels and it's clear that most of the investors are speculators now. It pains me all the more considering I was invested in oil in 2000 -- Chesapeake Energy to be exact, at 7 dollars a share. Once again, I was in too soon, and sold before the huge spike in oil prices that precipitated this frenzy.

Now, there's a claim that the oil discovery in the Gulf of Mexico is huge and some even talk about it reconfiguring scenarios about the future and the decline of our oil stocks now that a giant surplus has been discovered. There's still debate about how big that surplus really is, but what the market's reaction has shown me is that even if oil is a legitimately scarce resource, it's incredibly volatile (duh) and even beginning to view it as a stably-priced commodity is pure and simple naivete. The talk of oil prices remaining at a certain, $60-plus level smacks of "the new economy" philosophy that was used to justify extravagant price jumps in Internet stocks -- another similarity. All hype markets start to look the same.

So, more fool me for engaging in a hype market. Although I'm typically very skeptical about markets like that, the overall stagnancy of the market and non-directionality made it very difficult to find stocks that were clear winners and so I suppose I succumbed to the hype, the "quick and easy pickings" of gold and oil, none of which netted me a thing. In fact, the one holding that served me very well this year was Falconbridge (ex. Noranda), that was eventually purchased by Xstrata. A nickel and copper mining play that I got into before those markets heated up, before it was on anyone's radar. And that's what successful stock investing is all about to me -- finding markets that are off people's radar, or that are hated, and getting in early. It's difficult now to find a pure information edge on anyone else, but this is kind of a secondary edge, one that involves making use of people's behavioural tendencies to negate the supposedly free information. Information is much more readily available, but that has not improved people's interpretations of it, and that's why I'm still more willing to side with Warren Buffett than Efficient Markets proponents when philosophizing about the equity markets.