Occupation: Chartered accountant, living in Bermuda
Portfolio: Exchange-traded funds, Standard & Poor's Depositary Receipts Trust, PowerShares Golden Dragon Halter USX China, Vanguard Small Cap, Vanguard FTSE All-World ex-US, and shares in Abbott Laboratories
Living in paradise
Two years ago, Mr. Donelle left his home town of Moncton, N.B., to work in Bermuda on contract for a "Big 4" accounting firm. Be envious: He reports, "The people here are very friendly and beaches plentiful - this is truly a paradise."
While attending university, Mr. Donelle experimented with stock market simulators to test some aggressive investing strategies. Good thing. When his stock picks plunged, he got a free lesson on the dangers of speculating in high fliers.
Cured of any get-rich-quick notions, he turned to studying investment approaches and legends such as Warren Buffett, Benjamin Graham and Peter Lynch. As a result, he ended up embracing passive investing for the core part of his portfolio and value investing for the satellite part.
Constructing a portfolio
Under passive investing, market timing and stock picking is avoided by buying and holding low-cost index funds or ETFs. His ETF portfolio is diversified internationally, with a tilt toward Chinese stocks and U.S. small caps.
As his career progresses and he puts aside more savings, he intends to allocate 15 to 20 per cent of his portfolio to value stocks. He has already made a start by purchasing shares in drug maker Abbott Laboratories.
How he finds value stocks
He screens for strong companies with enduring competitive advantages, ample cash flow and shares trading at bargain prices. To determine if a stock is a bargain, he uses "discounted cash flow techniques" to calculate the present value of future cash flows expected from the company.
He then adds a margin of safety by reducing his estimate of present value by 20 to 25 per cent. If a stock of a company with an enduring competitive advantage and ample cash flow is trading below this adjusted figure, it could be a good value.
He likes Abbott Laboratories because (among other things) "gross profit margins have increased consistently and now remain above industry averages." Furthermore, the diversified pharmaceutical company produces strong free cash flow and pays a dividend close to 3.5 per cent.
He also has his eye on Burlington Northern Santa Fe Corp., a U.S. railway company. It's one of Warren Buffett's largest positions. Mr. Donelle presents other reasons for considering the stock in his blog at www.terminalvalue.blogspot.com.
"It was averaging down on all my positions during the March lows."
It was the halving in prices of penny stocks he bought while experimenting with stock market simulators.
"If you have the time to follow individual companies, heed Warren Buffet's advice and read Chapters 8 and 20 of Benjamin Graham's The Intelligent Investor ."
Special to The Globe and Mail
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