Communications

Financial letter

July 2024

Volume 15 Number 3

Introduction

 

Hello everyone,

When you’re sailing, it’s important to have a good boat with a competent captain at the helm, but what really helps is to have the wind at your back. In North America, for more than 200 years now, the stock market has offered investors an average annual return of nearly 10%. In terms of enrichment, it’s the most powerful and consistent vehicle out there. Obviously, there’s a caveat here, because investing in the market is not without risks; headwinds can be expected periodically.

Right now in the markets, particularly in the U.S., there is a clear uptrend. As a result, most of our portfolios have been fully invested since the beginning of the year, and the return on our “equity” portion far exceeds its benchmark. While some periods do not provide optimal conditions for our strategy and our stock selection process, the current trend allows us to position ourselves appropriately according to our criteria. In other words, you have to hoist the sail when the wind is blowing, and we hoisted it all the way at the right time.

Here is the link to the “Performance” page of our website:

https://rivemont.ca/en/performance/

In this newsletter, I will first review the past quarter and our investment decisions. After that, I will briefly discuss leveraged index funds, the so-called “2x” or “5x” funds in the industry. As usual, we will conclude with our market outlook and our largest positions.

We hope you find this newsletter informative.

        

Third Quarter 2024

 

Performance depends entirely on preparation. Although this concept is not fully true, you can certainly understand its meaning. I also came across this quote, but I thought it made even less sense:

“Plans are worthless, but planning is everything.” Dwight David Eisenhower

Having said that, the point I’m trying to make is that the decisions we’ve made over the past three years are really the ones that are making the most money right now, not the ones we made in the last quarter. For example, we’ve held IFC, SANM, BSX and NVT for several years, and these shares have all hit record highs since the beginning of the year.

However, if you know me, you know that I’m already preparing for the next wave that will hit the bow of the ship.

I’ve been waiting for this moment for a long time, and we’ve finally taken a significant position in the precious metals sector with the purchase of Wheaton Precious Metals (WPM), which is traded on the Canadian and U.S. markets. Founded in 2004 in Vancouver, it’s a global company specializing in the production of gold, silver, palladium and cobalt. Yes, I know, I talked about this in the last newsletter, but because the purchase was made in the second quarter, I’m going to bring it up again, because I really like the industry.

It’s quite possible that over the next few quarters we’ll be investing even more in this technically highly promising industry, with gold prices trading near all-time highs as a result of increased demand from non-Western central banks.

 

SPDR Gold Trust

Source : TradingView

 

One of the sectors that has been surprisingly strong for some time now is life insurance. In Canada, one of the leaders is Manulife, and the stock is showing attractive strength. This is our latest addition to the portfolio and a simple way to improve our current diversification given the low correlation of the stock to the tech sector, for example. And with a 4.5% annual dividend, it would be hard to resist.

 

Leveraged ETFs

 

It was a recent discussion with a client that prompted me to write about one of the least understood products available on the stock market, namely leveraged exchange-traded funds.

An exchange-traded fund (ETF) is an easy and inexpensive way to gain exposure to an asset class. For example, you can use a fund like the S&P 500 to get a significant return from the largest U.S. companies, or you can use the SPDR Gold Trust to hold gold without actually having to hold ingots in a vault (they do that for us).

However, for more aggressive investors, exchange-traded fund companies have created ETFs that multiply the performance of the underlying index, often by two, but occasionally by five or even ten. They use derivatives to do that. These same products are also available to multiply the inverse performance of the index. For example, here is the description of HOD.to, the BetaPro Crude Oil Inverse Leveraged Daily Bear ETF from Global X: HOD seeks daily investment results […] that endeavour to correspond to up to two times (200%) the inverse (opposite) of the daily performance of the Horizons Crude Oil Rolling Futures Index.

What the public usually doesn’t know is that the result sought is daily and not long term. The greater the leverage, the more, in the long term, the price of the ETF tends towards 0, making the investment completely worthless. I will illustrate this in two ways, mathematically and graphically.

Imagine an asset that goes up and down by 15% on two consecutive days.

Let’s assume double leverage on a $100 investment:

Day 1: 100 x 1.3 = $130

Day 2: 130 – (130 x 0.30) = $91

Thus, two consecutive days of the same rise and fall result in a loss of nearly 10% on the initial investment!

Now here is the chart of HOU, which doubles the daily performance of oil, since 2019:

BetaPro Crude Oil Leveraged Daily Bull ETF

Source: TradingView

 

As the saying goes, a picture is worth a thousand words. It would make no sense for an investor to hold this type of product for more than a day, which makes it useless for the vast majority of us.

 

Market Prospects

 

 

Favorite Securities

 

You will find below a list of the individual securities with the largest weight in our portfolios. These stocks were selected based on their respective potential to outperform the market. You will find a short description of their activities, the annual dividend, if any, and the total return since their first inclusion in our portfolio

 

Conclusion

 

Our process is different from that of most of our competitors. We believe it is superior both in its robustness and in its flexibility. That being the case, if we manage to achieve attractive returns in both calm and turbulent waters, we will have met the expectations of our clients, who have placed their trust in us for nearly 15 years now.

Thank you and enjoy the summer!

Sincerely,

Martin Lalonde, MBA, CFA

President

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