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Investor Newsletter

The real secret of investing success, a 'fabulous' TFSA strategy, and the portfolio of a Dragons' Den star Add to ...

I’ve never had much faith in investor education or its buzzword equivalent ‘financial literacy.’ It has admittedly had positive effects – investors are far more fee conscious now, for example, thanks to the work of Rob Carrick and others – but in most situations investors are making the same mistakes they’ve always made, only in slightly different ways. Rallies get chased, market bottoms get sold, short-term trends get extrapolated too far into the future, and investors still try and ‘catch a falling knife’ by buying assets with plummeting prices, only to see them fall further.

The main problem, in my view, is that the most engaged investors, those most interested in markets, tend to make the most transactions when every study ever done shows that more trading activity leads to lower returns. A website called Tradeciety combed the academic research and among other findings, uncovered that “The average individual investor underperforms a market index by 1.5 per cent per year. Active traders under perform by 6.5 per cent annually.”

Human psychology is a powerful thing, often overriding common sense. The joy of a single good trade makes us want to do it again and again even if we know it’s probably a bad idea. The brokerage industry and mammoth Las Vegas casinos are built on this impulse – the will to keep playing when we intellectually understand that the odds are against success.

This is why financial literacy doesn’t work as well as it should. Knowing the probabilities isn’t enough for the human brain, which means controlling emotions and unproductive impulses is the real secret of investing. 

-- Scott Barlow


Three big numbers to note

2.6% The amount U.S. health care stocks on the S&P 500 are down so far this year. They're the only group in the S&P 500 Index posting losses in 2016 and are on pace for the first yearly decline since the bull market began in 2009.

5.8% The amount global investors have in cash, according to the latest Merrill Lynch survey of global investors. That's back at the highs that were hit in July following the Brexit vote, and up from 5.5 per cent from last month.

6.6% The amount profits have come in higher than expected with 52 companies in the S&P 500 reporting earnings so far, according to data compiled by Bloomberg.


Stocks to ponder

Exchange Income Corp. This dividend stock is just about to cross the key $1-billion market capitalization level. It also offers investors an attractive 5.6 per cent yield with a dividend that has progressively moved higher over the years, writes Jennifer Dowty. Exchange Income Corp. has two business segments: Aerospace and Aviation, and Manufacturing. The company has also been growing through acquisitions. It posted strong second quarter results in August, boosting its stock, and has a strong balance sheet. There are nine ‘buy’ recommendations and two ‘hold’ recommendations on the stock. The average one-year target price is $39.15, which implies there is 9 per cent upside potential in the share price. If you include the dividend yield, the potential total return is over 14 per cent.

Brookfield Infrastructure Partners. Gordon Pape writes that he continues to add this stock to his registered retirement income fund because it combines reasonable risk with dependable and growing cash flow.  He writes that he first started to buy it in 2010, when the unit price was $12.60 (split-adjusted). Since then has the price has increased about 250 per cent and the distribution has gone from $1.10 (U.S.) a year to the current $1.57. He says he continues to buy additional units on any price dip and have recommended it to readers of his Income Investor newsletter.

Leucrotta Exploration Inc. This stock has been a stellar performer and had 14 "buy" recommendations and a 25 per cent upside forecast from analysts, writes Jennifer Dowty. Leucrotta is a Montney focused oil and gas exploration and production company. It has a strong balance sheet and its management and directors have a significant ownership of about 16 per cent. It doesn't pay a dividend but the shares been on a strong uptrend and are up 150 per cent year-to-date.


The Rundown

How Dragons' Den star Joseph Mimran invests his money
Joseph Mimran was a late bloomer to the investment world, writes Brenda Bouw. " I didn’t invest in the stock market until the Monaco Group went public in 1986. It was after that, in 1987 or 1988, when I started to put some money in the market. I learned very quickly how treacherous the stock market can be."

Study finds flaws in 4% rule on investing for retirement
Financial planner William Bengen wrote a paper in 1994 called Determining Withdrawal Rates Using Historical Data. He figured that, for a balanced portfolio of stocks and bonds, a 4-per-cent initial annual withdrawal rate, subsequently adjusted for inflation, could be maintained safely for at least 30 years without running out of money, writes Norman Rothery. Problem is, his results were based on U.S. data, and the U.S. market was one of the best-performing ones in the world since 1900. When applied to international markets, the 4-per-cent rule runs into trouble, according to a new paper called The Retirement Glidepath by Prof. Javier Estrada of the IESE Business School in Barcelona, Spain.

The 21 TSX stocks paying below average tax rates
Apple Inc. is the current poster child for corporate tax avoidance. It’s long been known for the piles of cash it keeps in its foreign subsidiaries, rather than bringing the money back to the United States and paying corporate income taxes in its home country. The most recent development for Apple – the European Union ordering Ireland to collect $14.5-billion (U.S.) in unpaid taxes – underscored the scope of the company’s tax-reduction efforts, writes David Milstead. Apple is not alone, however, and the phenomenon of corporations paying lower taxes is not limited to the United States. Major Canadian companies have boosted earnings significantly in recent years by paying less in taxes, according to a recent report from CIBC World Markets’ Institutional Equity Research department. They estimate that over the past 30 years, lower taxes have accounted for 17 per cent of the earnings growth in the S&P/TSX composite index.

Why this investor uses a core-satellite portfolio
Robert Bezede started investing at the age of 13 through his parents’ trading account, guided by numerous investment books and blogs. His savings and investing generated enough money to pay for his university studies, he says. Larry MacDonald writes that Mr. Bezede follows a core-satellite investment approach in his portfolio: The core contains passively managed index funds and the satellite contains his stock picks.

A bold Merrill Lynch forecast to give income investors pause
For investors looking to position their portfolios for 2017, there is one question that dwarfs all others: Will economic growth and higher interest rates take hold as the new market trend, or can they expect secular stagnation and more of the same sluggish, grinding forward for the global economy? The stakes are high here because the investments that would perform best in each scenario are so wildly different. Resource-related stocks, for instance, would underperform badly in slow growth environment, but generate big returns if the U.S. and global economies accelerated. Perhaps more importantly, the extremely popular income-generating sectors that have done well in recent years would likely see dramatic weakness with an inflationary market backdrop, writes Scott Barlow.

How to profit from Canada’s wine renaissance
Canada’s wine industry has undergone an amazing renaissance in the past 25 years. Gone are the days of syrupy Sherries and sweet bubblies that were once the hallmark of the industry. Today, wine makers from Nova Scotia to British Columbia are producing varietal wines that can hold their own with any in the world. Business is booming, writes Gordon Pape. The problem for investors is that there are few ways to participate in this unique growth story. With the sale of Constellation Brands' Canadian wine business to the Ontario Teachers’ Pension Plan this week, that leaves only two ways for investors to participate directly in our domestic wine business: Diamond Estates, a small stock, or the more substantial Andrew Peller Ltd. He explains why he likes this investment in particular.

Valuing the S&P 500 as a business: priced for perfection
U.S. equity markets are trading within a couple of percentage points of their record highs, so it is not surprising that there has been a flurry of articles on whether the market is overvalued. Few of them, however, look at the market index as a business in which you might invest, and at what price, writes Robert Tattersall. This is surprising because investors are often encouraged to view a potential investment as if they were buying the whole company rather than a few hundred shares. If you know that you cannot sell instantly, you are more likely to adopt a long-term viewpoint on the profitability of the business and the cost of an investment in this earnings stream.

Why mutual fund investors need to stop thinking
It’s a good thing Napoleon Hill’s classic book, Think and Grow Rich, wasn’t about mutual funds. If it were, it would have been a dud. Success, according the author, comes from channelling desire, faith and persistence. That might work in sports and business. But it doesn’t work for mutual fund investors, writes Andrew Hallam. Investors in actively managed funds usually think about two things. They wonder how stocks will perform, and they wonder how well their chosen funds will perform against the market. Most investors add more money when their funds do well. They sell or cease to buy when their funds sink or lag. This kind of behaviour can really kill profits. Removing those decisions might juice returns.

Ten Canadian stocks positioned for sustainable dividend income
These 10 stocks have a strong yield, but also have the cash to pay for it, writes Number Cruncher contributor Craig McGee. The list includes Cogeco Communications, IGM Financial, TMX Group and others.

Why challenging times could be ahead for real estate
Challenging times may be ahead for all types of real estate, not just housing. Real Estate Investment Trusts, most of which hold commercial properties, have been a stalwart in the portfolio of income-seeking investors for years now. But with speculation of a rate increase in December by the U.S. Federal Reserve, REITs have been volatile. The S&P/TSX Capped REIT Index was off almost 8 per cent from its 52-week high as of Oct. 17 and has underperformed the broader S&P/TSX composite index in the past few months.


Ask Globe Investor

The Question:
I'm at the starting stage of saving. I've decided to take the "pay-myself-first" route and automatically put $100 bi-weekly into a TFSA mutual fund with TD Bank. Is that a good way to start? I eventually see myself getting into direct investing once I'm more comfortable. I just wanted your opinion on the $100 bi-weekly into a mutual fund that I don't plan on touching for five years.

The Answer:
I think it's a fabulous idea. Many people lack the discipline to voluntarily set aside cash for savings, so making the process automatic is a smart move. I also like the fact that you are choosing to save and invest inside a tax-free savings account. This means your money will grow tax-free and -- if you need to sell a portion of the mutual fund and withdraw the cash for an emergency or other purpose -- you can do so without tax consequences. What's more, the value of the withdrawal will be added back to your TFSA contribution room as of Jan. 1 of the year following the withdrawal -- something that doesn't happen with a registered retirement savings plan.

My one caution would be to check the management expense ratio of the mutual fund before you invest. If the bank is pushing a particular fund, chances are it has a high MER of say, 1.5 per cent or more. High MERs can exert a drag on returns. You might wish to investigate index mutual funds such as TD's  e-series, which have some of the lowest MERs in the business. The TD Canadian Index Fund e-series, for instance, has an MER of just 0.33 per cent -- a real bargain.

--John Heinzl

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 investors are in store for some fresh insight: John Heinzl will update the investment case for Algonquin Power & Utilities Corp., while Gordon Pape profiles two ETFs that offer one-stop shopping for those hunting for stocks with a history of regular payout increases. Tim Shufelt will also provide an update on the Holland Bloorview Kids Rehabilitation Hospital investment challenge that has three fund managers vying against each other in the hunt to raise money for charity.

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

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Compiled by Gillian Livingston and Darcy Keith

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