The Globe and Mail, Report on Business
Published November 24, 2007

Over the last few weeks, I've been spending lots of time speaking with clients and other investors. It's been interesting because while I want to talk about Steadyhand, Steve Nash and the snow at Whistler, all they want to talk about is the bad stuff that is going on right now, namely subprime, asset-backed commercial paper and America in 3D (dollar, deficits, derivatives). The market going down every day has also got people's attention. Needless to say, there is a definite consensus that we live in risky times right now.

When I hear these concerns, it usually elicits a few responses from me.

First of all, I plow ahead stubbornly and talk about our funds, Stevie and the snow conditions. I may be a "New Age sensitive guy" but I'm a lousy listener.

After I've said my piece, I precede to reinforce their concerns. The risks are real and could have a profound impact on our economic environment in the coming years. And to make matters worse, my banker friends don't give me any reassurance. It still sounds like they're standing at the edge of a cliff.

Having said that, I next remind my audience that the future is always uncertain. There is no less risk when markets are going up and the headlines are rosy than there is today. It is a constant part of investing and portfolios should always be prepared for a variety of outcomes.

And finally, I jump up on the table to make the point that (perceived) uncertain times are a terrific time to invest. That's because if we're reading about it in the papers, then the bad news is already baked into the cake. Even if the worst predictions come to pass, the market impact may be quite limited.

I'm not suggesting that it's easy to invest when the headlines are ugly, because it isn't. It takes guts to put a "buy" order in when your colleagues are selling and your previous two purchases went nowhere but down. And not only is it scary, but it's harder to find reasons to buy. The news is heavily slanted towards the negative stuff, so exciting long-term prospects are obscured by short-term disappointments.

As a former colleague used to say when a stock was beaten up, "you don't need to spend time looking for the warts - they're easy to see - it's time to go looking for the positives." That applies to the broader context as well.

I'm also not suggesting that the "buy on bad news" rule can be applied in isolation. The context of the bad news and perceived uncertainty is always important. In other words, there are some key questions we have to answer before we start writing "buy" tickets.

When I put on my analyst hat, I want to know if the stock has substantially absorbed the bad news. Weighing uncertainty around a stock that is only a few weeks or dollars away from its high is quite different than doing so for a stock that has been down for a year or two.

In general terms, I also want to have a sense of where we are in the cycle for profitability and valuation. I'm not one to get too exact about these kinds of things, but I do want to know if we are at an extreme. Declining profit margins may make for dire press releases, but if the level is still high relative to history, then I know I'm not yet looking at a screaming "buy" opportunity. Today we are starting to see more earnings disappointments, but in general profit margins are still near historic highs.

As I've written in this column numerous times, long-standing trends that have gone to extremes invariably take a long time to correct, and the degree of pain usually ends up equalling that of the previous euphoria. The housing debacle in the United States is a great example of this. Today we are seeing the flipside of one of the greatest housing cycles of all time.

When markets head south and we start to feel some pain, good portfolio managers start to get excited. While they are asking these questions, they are also tuning up their financial models and identifying stocks they want to buy.

Individual investors with years of investing ahead of them should also be smiling. A dollar invested today goes further than it did a few weeks ago, particularly in the U.S. market.

As I climb down from the table, I admit to my weary listeners that I haven't a clue where the market is going from here. But I implore them to get more interested in investing at times like this, not less. It's not a time to hide. While there are questions that need to be answered and patience is required, the table is being set for some supersized returns.