The Globe and Mail, Report on Business
Published January 26, 2008

I had a column written for this week on how investors should expect lower returns, lower than what they have achieved in the past 10 to 25 years. I decided to put it in the can, however, because it felt too much like piling on. The markets are providing enough bad news for one month.

Conversely, we need to really search for the positives. But I think it's timely that we give it a shot because that's what the great investors are doing right now. At times like this, I always think of my former partner, Bob Hager, who was at his best in these markets. He flat out gets excited. It was his not-so-gentle push in September of 1998, after the market was down over 20 per cent in August, that got us writing buy tickets.

Okay Bradley, that sounds great. So where are the positives today?

I guess we can start off by gloating a little. At current prices, it's now obvious that the foreign predators that bought so many of our Canadian companies paid too much. It turns out they saved us some pain. We saw that explicitly last week when Advanced Micro Devices (AMD) admitted to paying 30 per cent too much for ATI Technologies and took a $1.7-billion (U.S.) writedown.

We should also be pleased that our banks' expansion plans in the United States are well behind schedule. The result has been that they have weathered the banking crisis extremely well so far (with the exception of CIBC).

But if I'm to be less cynical and more productive about our current plight, there are some real benefits to investors.

The global mega-banks that our financial system depends so heavily on - companies like Citigroup, Morgan Stanley, Merrill Lynch, UBS - have been able to raise billions of dollars in new equity capital. Existing shareholders have been diluted, but dollars from the sovereign funds have strengthened the foundation of the capital markets.

Well funded private equity and hedge funds will also provide the capital needed to sort out our problems. One thing we can count on from the American capitalist system - it's not afraid to admit a mistake, sort out the mess and move on. The market impact of the savings and loan debacle in the early 1990s was short-lived and while Enron stayed in the headlines for years after it blew up, the company's operations were carved up and reconstituted in a matter of months.

Risk is being priced more rationally today than it has been over the last two or three years. Price-earning multiples are down dramatically (although earning forecasts have to come down some) and the extra yield an investor receives for buying a corporate bond is meaningfully higher.

There is other good news. When markets melt down as rapidly as they have, there is nowhere to hide. Everything goes down - good, bad, ugly. As a result, quality companies get beaten up, which presents an opportunity for investors. For the first time in months, our managers have a number of potential new holdings they are watching for an entry point.

At time of writing, some of Canada's premier companies are at multiples we haven't seen in years. Royal Bank is trading at 10 to 11 times earnings and yielding 4 per cent. Recession-resistant stocks have gotten cheaper. Tim Hortons, Shoppers and Yellow Pages are well off their highs. Our quality cyclical stocks like Teck Cominco, Finning and CN don't have so much China hype in them any more. And those who couldn't stomach buying Research In Motion at $110 and 35 times earnings, can now reconsider at 20 per cent off.

If investors want to take some credit risk instead of equity risk, they can now buy high-quality corporate bonds at pretty fancy yields. A 10-year bond from Toronto-Dominion Bank - the one that got through the recent turbulence unscathed - is now yielding 6 per cent, which is a premium of 2.2 per cent over a similar term Government of Canada bond. In July, this spread was 1.1 per cent.

Our dollar is also good news for Canadian investors. While everyone likes to focus on the nanosecond that it traded at $1.10 (U.S.), it is still very strong at current levels. As a result, we're in an advantageous position to buy beaten-up foreign securities.

All of this is a bonanza for RRSP holders and other investors who don't need to dip into their investment account for at least five years. They've been given a gift. They are getting sale prices at a time when they need to put more money into their account. How often does that happen? Too frequently people are making their yearly contribution in a rising, or even hot, stock market.

By sifting through to find the positives, I'm not trying to make light of the weakness in the economy and the banking crisis in the United States. It's serious stuff and nobody knows when it's going to end. We won't know until much later if we were heading into a punishing bear market, or the worst was already behind us.

We do know, however, it's time to get out from under the desk and start looking for the opportunities. We have come through a period when everything got hit indiscriminately. We are entering a phase when the winners and losers will be sorted out. It's a period when alert investors can start to make money again, whether the markets trend up or down.