January and February Updates
Initially, this update was supposed to come to you in January. With Trump's inauguration, threats of tariffs, and uncertainty, I kept re-recording this. There are a couple of ways to correct this, and I’ve decided that I’m going to do more frequent updates. I don’t like sending out old information, but I also don’t like continually redoing these videos so that nothing ever gets sent out. These more frequent updates will be named something else so that you can skip these if you’re not too interested.
If you have no interest in any of these updates, you can always unsubscribe. Now we’re well into February, and I have the numbers for January, so it makes sense to do one more extensive update. I’ll go through the regular review and then talk about the issues in Canada/US relations, how I view that, and the plans I have formulated to deal with this significant concern.
The merger with Meagan made for a hectic end of the year, and now that it is official, we are rolling into 2025 with optimism and enthusiasm! On the other hand, the stock markets haven’t taken that same path. It was a somewhat muted end of the year, and as sometimes happens during the holiday season, there was some volatility. The Orion fund ended 2024 up by 24.21%, despite a decline in December of 1.11%. In January, as you would imagine, things were volatile. There was a lot of uncertainty, particularly with the high threat of tariffs. The Orion Fund ended January with a gain of 1.74%. February has been more difficult in the markets thus far, and I would anticipate a loss through February, but we’ll see how things go over the final days.
Things remain somewhat uncertain. We have Donald Trump's presidency and still no absolute clarity on the tariffs and what those will look like. This afternoon, Donald Trump said that the tariffs are “on time.” That tariff question is a huge one for Canada because we have so many exports to the US. Those tariffs are also enormous for the US because they will impact global imports (from the sound of things). With this administration in the white house, things change very quickly and without warning. The last time the tariffs were announced was on a Saturday, and by Monday, they were paused for 30 days. This illustrates the difficulty in predicting and planning for a market tied to a US administration making announcements at all hours and every day of the week!
That isn’t the only issue causing uncertainty for us. There are some valuation concerns in several stock market areas. The S&P 500 has had back-to-back years of gains of over 20% (23.31% in 2024 if you’re curious[1]), something that has only happened a few times before. The last time was in the mid-90s, when we saw enormous gains, predominantly in tech and telecom names. This big run over the past couple of years makes it hard to know where we are in the cycle. While common sense tells us that we should “buy low and sell high,” the truth is that we’re somewhere in the middle for many assets.
With the merger with Meagan, I wanted to explain how I manage money and my investment philosophy. First, the goal of professional money management is not just to get the absolute highest rate of return. I hate to say this, but that is the amateur way of looking at things. Instead, I believe that the focus should be on risk and that the goal of professional asset management should be to get proper compensation for the risk you are willing to take. I manage the fund by looking to invest in high-quality businesses. One of the things that is different about how I do things is that I view buying stocks as though we were buying a company. It’s not just some quick hit, a holding period of a few days, or hopes for a huge return. I buy a piece of a business and having that view changes how you invest. How has this gone for the Orion Fund? First, let me say that we are primarily, but not entirely, invested in Canada and the US, so as a result, I like to look at the fund performance along with the TSX here in Canada and the S&P500 in the US. I also like those as a gauge because they’re widely viewed, and you can quickly see how they’re doing.
Over the last three years, the TSX has returned 8.58%[2], a value before fees.[3] The S&P500 has returned 8.94%[4]. The Orion Fund, net of fees, has returned 10.64% annually over the past three years. This means that the fund has outperformed both indexes over that period. Importantly, we earned that better rate of return despite showing less volatility (and, in essence, less risk) than the overall markets.
There are a couple of points that I want to emphasize from this. First, when you see advertisements discussing fees and try to make the point that fees are the primary consideration, it’s just part of the story. Of course, fees are important, but the overall outcome of your situation matters. If you pay less and end up with less, that is worse than paying more and winding up with more! Second, there is much talk that you can’t outperform the index, and active management doesn’t work. A major criticism is that active managers don’t earn enough to cover the fees and expenses, so you’re better off buying the index. I’m proud to point out that if you have invested with me from the start, that hasn’t been your experience. We’ve performed better than either index, with less volatility and including fees.
I want to address the second term of President Trump, the trade war, tariffs, and the overall uncertainty we face now. Make no mistake: A 25% tariff on Canadian exports to the US would be catastrophic for the Canadian economy and would also hurt the US economy. The consensus seems to be that these tariffs are a threat but not likely to be implemented, or this is my view from reading the markets and how things are shaping up. Since the tariff threat was made (November 25th), the TSX has declined, but so have the US markets, and that decline appears to be a general weakness as opposed to concerns about tariffs. Looking at our portfolio, we see that tariffs would more impact some companies than others. For example, our Canadian energy names would be impacted significantly (if this was indeed 25%), whereas Fairfax Financial (predominantly insurance) would be less affected. Apple could see some impact with a tariff on China, and JP Morgan wouldn’t see direct impacts (secondary impacts are another story for most of the economy). You can trust that I’ve looked through our portfolio and tried to assess this risk for each of the holdings and have been monitoring this situation closely and carefully.
I can’t promise you that I’ve got this all figured out, but I can promise you that I’m trying to manage this risk prudently while at the same time looking for some upside. I have a game plan with our holdings and have examined several ways to handle this. Some of you have been clients of mine for a long time, and you might recall times when I managed money for you through past crises. In 2008-09 and again in 2020, I took what I would consider a “scorched earth” approach, where I sold almost everything and moved to safe assets to let the damage take place and take advantage of those lower prices. I have the courage to make that difficult decision and act if I think that is warranted. However, I will not be taking that same approach, nor would I recommend it. There are several reasons for that, and instead, I’ve formulated what I think will be a more balanced way to navigate this ongoing issue. Without a doubt, I have some concerns about the reason for the aggressive posture that the US has taken, but at this point, we are best to remain invested and approach things cautiously as opposed to making rash decisions. Let me just be clear that this is a difficult situation. If the tariffs are never enacted and implemented, we’ll hear that “this was a bargaining chip all along”, and if they are enacted. If we see financial damage, we’ll undoubtedly hear that “we knew that this was coming and should’ve prepared” or maybe “we should have sold everything!” I take a different view. I’m comfortable admitting that things are uncertain, and I’m not sure whether the tariffs will be enacted. I’m also confident that our investment style and attention to risk will help us navigate this situation.
Lastly, in a lengthy update, some sectors will do well in this environment. In the US, financials should be in good shape; industrial and defense are areas to look at. European and international companies are also attractive. The point is, despite these challenges, there are areas we can look to for some opportunities.
Thank you for reading,
Vic
[1] https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes
[2] https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-composite-index/#overview
[3] I’m just going to say that this irks me because you can’t actually buy this with no fee anywhere, but this is their annual return with no fee, nonetheless. The same comment applies to the S&P500.
[4] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
