This past year has brought some element of change to every business in every sector. As we reflect on 2020 and the many changes that emerged, the Canadian energy industry was arguably one of the most impacted by these changes.
An Internet search on the subject of “ways to simplify your life” offers up hundreds of articles, reports and books on the seemingly popular topic. Many of these pieces are penned by so-called life gurus, and recommend solutions such as “declutter your house”, “remove toxic influences”, “take control of your finances” and the very popular “reduce your social media use”. The basic concepts of simplification transfer well to the world of investment management, and have been the core of investment philosophies of some of the industry’s most successful and esteemed investors, Warren Buffett included.
I looked up from my desk and found the market down more than 10%. The next day, it was up 10%. The day after, down 10% again. That violent yo-yo-ing was the reality this past spring. At one point, the S&P/TSX Composite Index lost a quarter of its value in about a week. Reflecting on 2020, the most memorable (or rather, forgettable?) part of the year was the market freefall during the spring. Amid the chaos, our team triple-checked every holding’s balance sheet and the discounts on offer and acted decisively. During such a stressful period, how were we comfortable that we were making good decisions?
One of the few certainties in investing is the ubiquitous presence of uncertainty. As an investment manager, it is our business to deal with uncertainties as well as the attendant opportunities and risks that uncertain situations present. At Sionna, we spend a lot of time thinking about the behavioural dynamics that can drive mispricing in the market and how uncertainty plays a role.
Following sharp declines in March, the stock market staged an impressive recovery during the second quarter of 2020. While we were a bit surprised by the speed with which this happened, we also understood that, historically, the largest market gains can be found immediately following sharp declines. March was ugly, but the selloff created many value investment opportunities for us, as selloffs usually do.
Throughout human history, irrational investors have fluctuated between fear (value) and greed (growth speculation). Behavioural psychology of finance demonstrates we are more frequently and strongly collectively moved by fear of loss. This type of emotion has not been present in our markets for a long time; however, we firmly believe it will return and will benefit patient value investors who are focused on the long term.