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File photo of Federal Reserve chair Janet Yellen. (Matt Rourke/AP)
File photo of Federal Reserve chair Janet Yellen. (Matt Rourke/AP)

Investor Newsletter

My favourite investing story ever, stocks to benefit from a Fed hike, and the fund manager 50% in cash Add to ...

Charlie Munger is the less visible half of the Buffett-Munger partnership at the head of Berkshire Hathaway. One of the wisest investors of all time, Mr. Munger also told what could be my favourite investing story ever.

Mr. Munger was once at a fishing convention and saw a large crowd of people around a man selling brightly coloured fishing lures. He asked the vendor if the bright colours really helped catch fish and the guy answered, “Mister, I don’t sell to fish.”

If we equate the bright colours to investment ideas and number of fish caught to investment returns, the story has obvious implications for the brokerage industry. Brokers’ profits remain dependent on investor transactions to a significant degree, and there will never be a shortage of shiny new products or trade ideas designed more to sell well than generate strong long-term returns.

Mr. Munger’s fishing lure analogy also has much wider implications that depend on investor tendencies. A value investor, for instance, might find an ultra-cheap stock attractive, and fail to notice the company is in terminal decline, with no catalysts to put it back on a growth path.

Investors should take a step back when they see an investment that looks ‘shiny’ – the odds of being deceived, or deceiving themselves, can be high.       

-- Scott Barlow

 

A big number to note

18% The chance that the U.S. Federal Reserve will raise interest rates on Wednesday, according to traders' projections. But that rises to 60 per cent for a potential hike at the Fed's December meeting.

 

Stocks to ponder

Spin Master Corp. This stock, which makes toys and has branched out into animation as the producer of hit TV show Paw Patrol, is in a seasonally strong period, and solid financial results could send it onto the positive breakouts list, writes Jennifer Dowty. The company continues to make acquisitions and expand globally. All six analysts who cover the stock have "buy" recommendations.

BCE Inc. The communications company is a dividend stock where price weakness has represented a buying opportunity for long-term investors, writes Jennifer Dowty. The company's latest earnings were in-line with expectations and BCE boosted its dividend to 68.25 cents, up from 65 cents for a yield of 4.5 per cent. Seven analysts have "buy" recommendations and 13 have "hold" recommendations. The average target price is $63.22, implying about a 5 per cent upside over the next 12 months.

Brookfield Renewable Partners, Cogeco Inc., Brookfield Canada Office Properties, and Power Corp. of Canada.
Canadian stocks have lagged U.S. equities considerably since the start of the current bull market in March, 2009. However, this year the tide is turning, and if valuations and history are any guide, the superior relative performance out of Canadian stocks could be sustainable, writes John Reese of Validea.com. And he has four top stocks he likes best right now.


The Rundown

How dividends can reduce your tax burden
John Heinzl tells you why dividends are a great way to reduce the taxes you pay, as dividends are taxed more and more favourably the lower your income goes.

Why I’m 50 per cent in cash, and why you should be too
Longtime Winnipeg-based fund manager Larry Sarbit says stock valuations are too high right now, and so he's built up the cash positions in his funds so that he can take advantage when valuations come down to more reasonable levels.

Prepare for bumpy markets as analysts slash profit forecasts
Canadian and U.S. equity values are being supported by lofty and fragile assumptions about future profit growth that, if history is any judge, are unlikely to be met. Investors should expect market volatility as earnings forecasts are revised lower, writes Scott Barlow.

Learning to live with a dismal outlook for bond returns
The bond market has been on a multidecade bender. But the party is close to an end and the hangover could last for years, writes Norman Rothery. That means many people will have to plan for, and deal with, low bond returns, which likely means saving more and spending less.

Seven U.S. stocks that may benefit from an interest rate hike
Hugh Smith takes a look at which U.S. stocks will do well in the midst of interest rate hike headwinds. His Number Cruncher column looks at select U.S. banking and insurance stocks that made the grade.

An ETF solution to the preferred share quandary
With bond yields near record lows, income investors have been hard pressed to find low-risk securities that generate the cash flow they require, writes Gordon Pape. But there's a preferred share ETF people can look to if they're looking for cash flow.

Top oil and gas stock picks
Swanzy Quarshie, a portfolio manager at Sentry Investments, focuses on oil and gas stocks. Here are her current top picks: Bonterra Energy, Freehold Royalties and Seven Generations Energy.

Learn how to make money on the short side – you’re going to need it
It’s almost certain that we will see a global recession within the next two years, says Larry Berman. Global economies are nowhere near as strong as they need to be to continue to support this bull market and monetary policy is propping up stocks, but they're running out of effective tools. Investors should contemplate a decade of poor returns for equities and bonds, he says, and should learn how to use inverse ETFs -- which move up when the markets move lower.

Robo-advisers face new rival as the cheapest place to get investing advice
Robo-advisers have barely been around two years in Canada, but their run as the cheapest place to get investing advice is already being challenged, writes Rob Carrick. A new investment firm called Transcend is offering light financial planning and portfolios built using equity funds that have a very low fee of 0.25 per cent.

Your back-to-school investing quiz queries answered
John Heinzl looks at his tough back-to-school investing quiz and shines a light on some of the toughest to answer.

Construction manager blends contrarian and ‘coattail’ investing
This construction manager has learned over the years what works and doesn't in investing. He's a contrarian and scouts out situations that are out of favour -- but have a catalyst for change that could lead to a revaluation, he says.

 

Ask Globe Investor

The Question:

When a Canadian stock, such as Brookfield Infrastructure Partners (BIP.UN-T) pays its dividend in U.S. dollars, and you are set up for (dividend reinvestsment plan) DRIP, should this investment be in a U.S. dollar account or a Canadian dollar account?  My concern is the conversion cost of exchanging U.S. to Canadian and then purchasing the shares for the DRIP. I would like to avoid the conversion premium charged by the banks.

The Answer:

It is true that if you hold the U.S. dividend paying stock in a Canadian dollar account that the dividend is converted into Canadian dollars from U.S. dollars. It is best to hold the shares in a U.S. dollar account, have the dividend stay in U.S. dollars and be used to buy more shares under the dividend reinvestment plan.

-- Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com.

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.


What’s up in the days ahead

Dividend-hungry investors are going to love John Heinzl's Yield Hog column this week. In recent weeks, many dividend stocks have dropped in price. He'll reveal four of his top picks right now. Speaking of stock picks, the Contra Guys are going to tell us why they think the turnaround at Reitmans Canada is just starting. And Strategy Lab contributor Andrew Hallam is tinkering with his index portfolio. You may be amazed by just how simple the portfolio has become.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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