On Oct. 25, 2000, people tuning in to watch Peter Mansbridge deliver the evening news already had a pretty good idea what the lead story would be: that day’s bloodbath in the markets; specifically, the 25 per cent plunge in Nortel shares. He didn’t disappoint. “Good evening. Investors went on a selling spree this morning, and tonight, millions of Canadians are paying the price. Just about anyone who invests in mutual funds or a pension plan lost money today. That’s because most of those funds include shares of telecommunications giant Nortel Networks.”
So you had a massive collapse in Canada’s most valuable company, the threat of widespread losses reaching far beyond the company’s immediate investors, and a deepening sense of panic and uncertainty pervading the market. In other words, a situation almost identical to what just happened to Valeant Pharmaceuticals, with one striking difference. Yes, as recently as August, the biotech was Canada’s most valuable company and—thanks to its red-hot stock-price performance over the previous two years—is a top holding in many mutual funds, exchange-traded funds and pension funds. And in the span of a week, Valeant shed 35 per cent of its value, the equivalent of $40 billion. As CBC reported back in the day about Nortel, that’s more than the total amount all Canadians sunk into RRSPs last year. But the public reaction this time around? Crickets chirping. (UPDATE: After this piece was written for the Maclean’s print edition, the National did a small segment on the drop in Valeant’s shares, which have since recovered some of their losses.)
Don’t get me wrong. This is very big news in the business press and, on financial news channels, the talking heads are spinning. But Valeant had failed to breach the barrier between die-hard market watchers and the broader public. There are some obvious reasons for this. Valeant is a financially engineered acquisition vehicle built to do one thing: consume other drug companies and slash their costs. That’s hardly the stuff of Nortel’s cheesy attempts at inspirational TV commercials, circa 1999; remember “What do you want the Internet to be?” Still, there’s no arguing that the era when it seemed as if every other person you met had a day-trading account and cabbies were quick with an IPO or stock recommendation, is dead and gone.
The attitude many Canadians have toward stocks now is neither love nor loathing, greed nor fear; just deafening indifference. This despite the fact that our latest market rout—brought on by a continuing collapse in oil prices and fears over China—has sent the S&P/TSX Composite Index back to the level it was at in January 2007. Over the last 10-year period, the index has delivered an absolutely pathetic annualized return of just 1.5 per cent, failing to keep pace with inflation. (This doesn’t include payouts of dividends, which help to soften the blow, but only somewhat.)
So why is it getting such little attention? Because Canadians have found something else to be emotionally and financially invested in: real estate. Now, the day traders are elementary school teachers accumulating portfolios of townhouses, and cabbies are keen to talk about their latest pre-construction condo buy.
The other day, BMO Capital Markets economist Sal Guatieri noted in a report that, over the past 15 years, an investor who bought a Toronto condominium had far outperformed the S&P/TSX. Not surprisingly, news of the report spread quickly online, confirmation for many that real estate is the best long-term investment. It’s a pitch realtors regularly make, and have been making for years. In fact, in January 2007, when the TSX was at the price it is today, Re/Max, the real estate brokerage, released a study touting real estate as the best available investment. “The average Canadian is not comfortable with the stock market and other investments and they go toward real estate because it is very predictable.”
Never mind that multiple studies have shown that over the long term—we’re talking the decades it takes to build personal retirement wealth—stocks beat real estate, or the question of whether you should ever treat your home as an investment; it’s obvious Canada’s housing market has left the broader stock market in the dust. But there’s a hard lesson many a mutual fund investor has learned, and it’s one Canadians should keep in mind now: Past performance is no indication of future returns. Both real estate and the stock market are cyclical—always have been, always will be—and, while housing is at the top of the cycle, stocks are wallowing near the bottom. If the goal of investing is to buy low and sell high, stocks make a lot more sense as a pure investment right now.
As for housing, when that cycle finally turns, you can be sure it’ll be the lead story.