Learning how to put aside the current and popular views and form an independent opinion is an important part of being a successful investor.
In an exhaustive, 240-page research report released in May, Merrill Lynch equity and quantitative strategist Savita Subramanian found that, over 10-year periods, valuation levels were responsible for more than 80 per cent of equity performance variability. Buy cheap stocks, and over 10 years it is highly likely that investors will outperform.
There is, however, an important and psychologically challenging caveat. Value investing works great over 10 years, but market history shows that buying cheaper stocks has very little effect on returns over one, three, five, or even seven years. To reap the benefits of buying cheaper stocks, investors have to wait the whole 10 years.
Few investors have the discipline to hold a stock that has underperformed for five years. There's always an excuse to sell, and always a new hot sector that looks like a more promising bet. The intense analysis accomplished by Ms. Subramanian suggests that investors faced with this dilemma should keep holding the stock anyway.
This is what Warren Buffett meant when he said his ridiculously successful investing style is "simple, but not easy." It's not hard to find cheaper stocks with sustainable earnings, but for most it is very difficult to hold on long enough to reap the rewards.
Three big numbers to note
22.3 Price-to-earnings ratio of the S&P/TSX Composite index, which is about 10 per cent higher than the S&P 500.
-13.1% Decline in Netflix's stock on Tuesday, one day after reporting disappointing subscriber growth.
15,800 Where RBC expects the S&P/TSX Composite to be trading at by the end of 2017, an 8.7 per cent rise from Tuesday's close.
Stocks to ponder
RioCan REIT
It's not often that long-time financial journalist and newsletter author Gordon Pape issues the equivalent of a sell rating on a widely held Canadian investment - but he did just that for RioCan REIT. He's worried about a dramatic change in management direction at Canada's biggest real estate investment trust. And he's not a fan of the stingy payouts at the REIT, which he has held for the past 20 years.
Canam Group
This stock plunged after announcing its second-quarter results will be hit by a one-time event. But our Jennifer Dowty notes the stock is oversold on the charts and history suggests the dip could very well be a buying opportunity.
Magna, Couche-Tard and more
Our most popular number cruncher so far this week came from Jean-Didier Lapoint of Inovestor Inc. He screened for Canadian companies showing strong economic performance as well as
revenue growth, and that are trading at least 10 per cent below their 52-week highs. Here's a bonus: they all feature dividend payouts.
Time to short Bank of Montreal?
Our Jennifer Dowty in today's Breakouts report notes that only one of 18 analysts is recommending Bank of Montreal shares right now. The stock may be getting overvalued from a valuation perspective and the charts aren't very encouraging right now either.
The Rundown
Risks on the rise
The best, most promising kind of equity market rallies are those when
stock prices are racing to catch up with improving profit outlooks. We
are not in that kind of rally. Earnings growth is extremely weak, which
means that so far, there is no recent fundamental underpinning for
recent equity market strength on either side of the border, writes Scott Barlow.
How to counteract miserly bond yields
Plunging bond yields are putting your retirement at risk. Over the past few years, the fading payouts from fixed-income investments have boosted the cost of a secure old age by roughly a third. The big increase in the price of retirement is one of the most insidious ways in which the great slump in interest rates is hurting average Canadians. But don't lose hope. There are strategies that can help counteract the drag imposed by today's miserly yields. Ian McGugan outlines four of them.
Beware the devil's metal
Silver prices have leapt nearly 50 per cent so far this year, reversing three years of losses, but history shows investors hoping to hop aboard the bandwagon should be wary.
Forget TINA
When the valuation of U.S. equity markets are well above long-term
averages, like they are now, with a laundry list of red economic flags,
prudent risk management suggests that you should be buying a short-term bond fund instead of a broad-based equity ETF. Or so argues Larry Berman, in this informative piece on risk management and why he's shunning equities in one of his balanced funds.
What's up in the days ahead
We know Canadian investors follow analyst recommendations closely, but should they? Ryan Modesto of 5i Research will take a closer look at analyst recommendations, how to use them in your investing strategies, and reveals some rather startling numbers on how they are parceled out on the Street. Rob Carrick tells us why it may be time to lighten up real estate exposure in your portfolio. And Gordon Pape issues a buy recommendation on a clean energy producer. Stay tuned!
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Compiled by Darcy Keith
Scott Barlow