Why Fundamentals Win Over Headlines in Volatile Times
What if the real threat isn’t the next headline, but reacting to it?
For affluent Canadians, especially entrepreneurs, professionals, and families, the daily flood of market news and noise can feel overwhelming. Yet, over the course of complete news cycles or market cycles, disciplined, fundamental-driven investing tends to outperform reactionary decision-making. The S&P/TSX, as a market, will always rotate through leaders and laggards in the short term, and the Bank of Canada will adjust policy as conditions evolve. What endures is the link between long-term business performance and investor outcomes. Business fundamentals set the climate, while headlines set the daily weather.
Learn more about me and our
services here.
The cost of reacting to headlines
Headlines are short-term, while what an investor is attempting to do is build wealth over the long term. Markets digest news quickly, often overshooting in both directions. Investors who chase stories typically underperform the very funds they own because they buy after good news and sell after bad news. In Canada, the effect is amplified by sector concentration. Energy, financials, materials and technology can trade on very different narratives week to week, while the underlying ability to generate cash flows, reinvest smartly and grow dividends unfolds over years.
Reacting to news cycles has proven to be costly. Process beats predictions in the long term. Rather than trying to jump between narratives, the best decision you can make with your investment advisor is to align decisions with factors that match good fundamentals. These factors usually include cash flows, balance sheet strength, returns on capital and management quality. In established funds, these data points can comprise a significant portion of the decision-making process for portfolio managers. Sticking to a process makes it easy to tune out market noise.
Timeless principles that drown out the noise
No matter the news cycle or market cycle, the following principles anchor a portfolio in the reality of process instead of headlines. They work across cycles and conditions, and it is a philosophy we follow for all clients.
- Intrinsic value vs. price. Buy businesses or sectors at a discount to what they are worth based on long-term cash flows. Markets, like democracy, are a popularity contest in the short run and a weighing machine in the long run. Intrinsic value, the underlying fundamentals, matters more than chatter.
- Margin of safety. The best investment processes build a buffer against errors and volatility from the start by seeking a meaningful discount to conservative value estimates. Advisors can help you spot sector trends for intrinsic value that will enhance your margin of safety buffer, especially over the long run. Margin of safety can often turn market swings into potential opportunities.
- Patience and discipline. Missing a handful of strong market days can devastate long-term results. Staying invested has historically fared better than retreating to cash during volatile market swings and then rushing to re-invest later.
- Process over prediction. Scheduled rebalancing, valuation discipline and a clear process with your advisor can help you ignore headlines and focus on wealth-building fundamentals.
- Position sizing and diversification. Moving into new sectors or industries should always be done strategically, with an eye to overall portfolio diversification. Just because technology could be hot, as the old saying goes, ‘don’t put all your eggs in one basket.’
Steve’s Advice: Have rules you follow in calm and in crisis. Time in the market beats timing the market.
A Canadian market perspective
The Bank of Canada’s rate decisions form an important backdrop for investors, but try not to overrank their importance in wealth building. Changes in the interest rate influence rates of borrowing from mortgages, credit cards and by extension investor expectations. Currency and commodity moves, two aspects within the Canadian investor market that is often the subject of daily news cycles, also shape S&P/TSX earnings profiles. This is due to the index’s heavy exposure to energy and materials. Remember, though, rate changes are not a timing bell. It is just another piece of context for assessing business fundamentals that will affect how competitive positions may evolve.
A good rule of thumb when considering the macroeconomic picture of interest rates, currency fluctuations or commodity swings is to let them inform your process and specifically evaluations of intrinsic value, but do not let them replace the process. In other words, do not look to overhaul your strategy on a single announcement, but look at the long-term assumptions for growth and decide with your advisor on the horizon of opportunity for each sector, index or investment.
Investment review checklist
What is a best practice routine to evaluate an investment or review a portfolio? The following quick checklist is something I follow, and it is straightforward enough for any investor to adopt, especially when assessing during volatility.
- Earning power. Do any of the recent developments affect the long-term ability of the sector to generate sales or cash? If not, its noise.
- Temporary or Permanent. The market news, even if it does impair a sector, is it temporary or long-term? Lasting impairments to a sector are worth a conversation with your advisor. Temporary could be as long as a couple of years, depending on your personal investment horizon.
- Automate Patience. Commit to scheduled re-balancing that limits trade frequency and sell-off directions that tie to this re-balancing and fundamentals, rather than headlines. Discuss how to respond in a 20%+ sell-off in the market at the outset. It might be time to invest more, not less.
Application to real portfolios
For defensive investors, those that are in a protection phase, diversified exposure across Canada and global markets with a trend towards quality and dividends can deliver steadier results without constant changes. Timed re-balancing in this type of portfolio tends to focus on trimming investments that have run ahead and buying what is ‘cheaper’ ultimately reinforcing the buy-low and sell-high behaviour. The net effect, typically, is that fundamentals have time to compound growth while the temptation to react to headlines dwindles.
For more active investors in the process, there should be a clear distinction between intrinsic value and the price. Meaning, if you truly believe in the underlying value of the sector or industry, you should know that price volatility and the businesses’ value can often diverge in the short run. Staying true to the process and original thesis with your advisor often pays more metaphorical dividends than reactionary changes to these during market noise.
Canadian research from long-horizon studies have repeatedly shown that staying invested during the worst days is often the only way to capture the best days that tend to follow. Morningstar’s research on the investor ‘behaviour gap’ shows that many investors trail the very funds they own, due to poor timing. Vanguard Canada has similar illustrated results in their long-term studies.
Keep in mind this simple truth – patience and process are competitive advantages when headlines are loud.
The last word
A fundamentals-first approach is not about predicting the next headline. It is about knowing what you own, what it is worth and deciding with your advisor how or if you should act before markets test your resolve. The principles mentioned above are a practical toolkit any Canadian investor can use to rationalize decisions, reduce ‘timing’ errors and stay aligned with long-term goals.
Steve’s Advice: “Volatility isn’t the enemy, emotion is. Excellence in investing comes from doing ordinary things extraordinarily well, consistently.”
If you are a client, thank you for taking the time to read this, and I look forward to our next conversation. Please feel free to share this with your friends and family who may be considering a move.
If you are looking for a second opinion on your portfolio or wish to have a planning conversation tailored to your needs, book a no-obligation complimentary portfolio review with me today.
Share this post
