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Investment Ideas How to apply logical thinking to investing, an overlooked dividend stock, and where gold is going next

Frankfurt-listed Xetra-Gold brought in about $544-million (U.S.) last week, the biggest weekly inflow with gold since 2012.

Leonhard Foeger/REUTERS

In hindsight, the most useful university course I ever took was also the most soul-crushingly dull: Introduction to Logic. It was basically an entire year of studying how to build ironclad arguments, the 'necessary conditions' that make a thesis not only persuasive but objectively true. It is important for investors to remember that every stock pitch is an argument.

The most illuminating parts of the course, the ones most helpful to investing, were discussions of logical fallacies or tricks that are used to make things look true when they actually aren't. Here's an investing-related example of a fallacy called Affirming the Consequent:

1. Facebook is a social media stock and a great investment. 2. Twitter is a social media stock, so 3. Twitter is a great investment.

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There is another logical fallacy called Appeal to Authority on which the entirety of business media is built. This states simply if a rich, successful fund manager says a stock will go up, then it's basically a guarantee. (There's a similar fallacy called ad hominem that can be summarized as 'your argument can't be right because you're an idiot.' Idiocy makes it less likely an argument is correct but it's not proof that it's false.)

As one more specific example, the Bandwagon Fallacy implies that popular ideas are correct merely by being popular, which as a strategy is also a no-go according to Introduction to Logic.

Applying logical thinking to investing is a very good exercise in my opinion. Future market prices are unknowable, so we can't prove truth or falsity for investment ideas now, but familiarity with fallacies helps invoke disciplined thinking and help avoid obvious mistakes. Dull as it is, this list of common logical fallacies can provide important analytical tools for investors.

-- Scott Barlow

Four big numbers to note

15,729.12 The Toronto Stock Exchange's S&P/TSX composite index hit a new record closing high, boosted by energy stocks. Its previous record close was 15,657.63, which it hit on Sept. 3, 2014.

20,270.88 The Dow Jones Industrial Average's new record close. U.S. President Donald Trump's promise of a "phenomenal" tax plan has helped revive a post-election rally in stocks.

2,316.15 The S&P 500's new record closing high. The S&P and Dow closed at a record high for a second straight session.

5,734.13 The Nasdaq Composite's new record closing high. The Nasdaq extended its streak of record closes to a fourth day.

Stocks to ponder

Metro Inc. Mention grocer Metro to a dividend investor, and you're likely to get a big yawn. With plenty of pipelines, telecoms and power producers offering yields in excess of 4 per cent, it's hard to get excited about a supermarket stock paying a puny 1.7 per cent, writes John Heinzl. But Metro's stellar stock market performance illustrates why it can be a mistake to give a company a pass based on its diminutive yield alone.

UrtheCast Corp. The stock price of this company has doubled in value year-to-date, rising 117 per cent, and analysts believe there is an additional 85 per cent upside, writes Jennifer Dowty. This is a stock best suited for consideration by growth investors with a high risk tolerance within a well-diversified portfolio given that its share price can be very volatile.

Bombardier Inc. A warning to Bombardier investors: Its debt metrics are the worst they've ever been, writes David Milstead. Investor sentiment on Bombardier is as high as it's been in some time; this week's news that the federal government will provide  $372.5-million interest-free "repayable contribution" for the company's aircraft programs is the latest good news supporting a run that has seen the stock triple since it plunged below $1 a year ago. The government cash combined with a debt refinancing at the end of last year means that Bombardier doesn't necessarily have any less debt or more cash today than it did in November – and the results of the fourth quarter may erode its position, if the company remains free-cash-flow negative, as expected.

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Western Forest Products Inc. The stock offers investors an attractive dividend yield of 4 per cent and its share price is gaining momentum. Stocks in the forest products sub-sector are seeing their share prices gain traction along with recent strength in the price of lumber futures. On the charts, this stock has positively broken out, writes Jennifer Dowty.

Timbercreek Financial Corp. This stock appears on the positive breakouts list of the TSX this week, writes Jennifer Dowty. The stock offers investors an attractive dividend yield of 7.4 per cent with the share price recently breaking out of a multi-year downtrend. Toronto-based Timbercreek is a mortgage investment corporation, a non-bank lender providing capital to commercial real estate investors. The loans are primarily short-term in nature, spanning from one to five years. The consensus one-year target price is $9.75, suggesting a potential price return of nearly 6 per cent over the next 12 months.

The Rundown

Watch for gold's renaissance as anti-currency

For investors, it's not easy to value gold in a modern context, writes Scott Barlow. The most famous economist of all time, John Maynard Keynes, described it as a "barbarous relic," best left to history classes. But there remains a small but vocal minority who believe the largely useless shiny metal should be reinstituted as the basis of all monetary policy. There is no confusion about the recent strength in precious-metals prices, as bullion prices have jumped 10 per cent since Dec. 21, 2016. There is also little confusion as to why the rally occurred – the gold price is moving in exactly the opposite direction as U.S. real bond yields. In addition, a hedge fund manager owning one of the strongest long-term performance track records ever, Stanley Druckenmiller, has again taken a significant position in bullion.

What Warren Buffett's breakfast routine can teach us about strategy

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Markets have a psychological effect on spending habits, even for billionaires, it seems, writes John Reese. When markets are up, confidence rises and people are apt to spend a little more. They feel they can splurge on that trip or go out to an expensive restaurant. Conversely, when markets are down, confidence wanes and people tend to rein in spending. In a new documentary from HBO titled Becoming Warren Buffett, we get insights into the many habits and traits of potentially the greatest long-term investor of all time. Every day the Oracle of Omaha heads off to work in his car with a set amount of money to buy his breakfast. He decides how much to take based on how the market is doing that day, but it is either $2.61, $2.95 or $3.17. There is a larger lesson here for investors. Control your discretionary spending when stocks are down and use the opportunities the market gives you over time to buy quality stocks. Investors need to focus on investing in the long run, not short-term swings.

These products offer bank dividend-like payouts with no downside risk - but there's a catch

Today's market-linked GICs are tailor-made for anxious investors: They tap into concerns about record-high stock prices, unsettled bonds and perplexing tweets from the new tenant in the White House, writes David Berman. But they won't answer all your concerns. Perhaps you've seen beguiling advertisements from major banks: Buy a guaranteed investment certificate that is linked to a basket of financial stocks or a major index and receive a handsome return if the value of these underlying assets rise. If these assets fall, no worries – the issuer will still give you a small return anyway. Right there, your downside risk is eliminated while you still get some exposure to market rallies, which is why these GICs (which are also known as principal protected notes) can appeal to the nervous Nellie within us. But you need to know what you're getting, and what you're giving up.

Why Goldman's epic postelection run is largely over

Donald Trump may not have done much yet for the coal miners and factory workers he pledged to champion, but he has made shareholders of Goldman Sachs Group Inc. richer by $25-billion (U.S.), writes Ian McGugan. That is the amount by which the collective value of the bank's stock has soared in the three months since the U.S. election. To be fair, Goldman is not unique in this regard. Like other U.S. banks, its shares have rocketed because investors expect the new administration to rip up regulations put in place after the financial crisis to limit lenders' riskier adventures. But what makes Goldman stand out is that it's Goldman alumni who are spearheading the deregulation. The sheer number of former Goldmanites in the White House reinforces the impression that the new administration will display an ingrained tendency to conclude that what is good for Goldman is good for the country. But don't conclude the outlook for Goldman is all that golden.

How to tell when markets peak

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Widening corporate bond spreads frequently provide warnings before major equity market sell-offs. Scott Barlow explores what they are foreshadowing right now.

Why this investor should stick with his mutual fund over ETFs

The past year on the stock market has left some people wondering if they need a new investment approach, writes Rob Carrick. The 21.1-per-cent surge by the Toronto Stock Exchange can be disorienting because a properly diversified portfolio would have made far less. In a recent column, Mr. Carrick estimated 5.3 per cent, after fees, for 2016. One reader took a look at the return from his balanced fund last year and saw he made a fair bit less than that. He's wondering whether he should chuck that fund and replace it with a quartet of exchange-traded funds. Mr. Carrick looks at the returns to see what's right.

U.S. fund giant Vanguard rolls out four new Canadian bond ETFs

Vanguard is pushing further into the Canadian fixed-income space with a slate of new bond ETFs, which began trading on the Toronto Stock Exchange on Tuesday, writes Tim Shufelt. Until now, the fund giant's Canadian presence has been primarily focused on equities, with two-dozen stock ETFs tracking a variety of indexes. The increasing emphasis on bonds comes at a time when Vanguard is trying to reinvigorate its Canadian expansion and claim a bigger piece of the fund market.

How much should this couple invest in a mutual fund? Zero sounds about right

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A reader sold a house in Toronto and was looking for some advice on what to do with the money left over after buying a condo. Their bank had just the thing for her and her spouse: a balanced mutual fund "designed for retirees." Zero seems about right, writes Rob Carrick, saying this couple needs more than one financial product, and instead needs good advice from a financial planner.

Gordon Pape: This RRSP portfolio has earned 10.8% annually

In February 2012, Gordon Pape created an RRSP portfolio for readers of his Internet Wealth Builder newsletter. It had an initial value of $25,031.92 and was designed with two main goals. The first is capital preservation – as with any pension plan, you don't want to lose money. The second is to earn a higher rate of return than you could get from a GIC. So far it has returned 10.8 per cent annually

Seven criteria for finding the right investment adviser

There's a lot of controversy around investment advisers these days, and whether their services are worth the fees investors fork over, writes Brenda Bouw. But once you reach a certain level of wealth, most experts agree it's a good idea to get professional advice to not just manage your portfolio, but also ensure your investments are tax efficient and aligned with your estate plan. The biggest mistake many investors make is building a portfolio based on a patchwork of advice from friends and relatives, says Chuck Grace, a lecturer at the University of Western Ontario's Richard Ivey School of Business and a consultant to the wealth management industry.

13 companies with recent insider buying and selling activity

Gold and silver stocks are amongst the top performers year-to-date, writes Jennifer Dowty. Interestingly, we are seeing insider selling activity in several gold and silver stocks that have realized phenomenal returns so far this year.

The week's most oversold and overbought stocks on the TSX

The benchmark's current RSI of 61.1 is much closer to the sell signal of 70 than the oversold buy signal of 30, writes Scott Barlow. There are only three benchmark constituents trading in official oversold territory with RSIs below 30.

Number Crunchers

Eight Canadian stocks lead the pack on these value measures

Twenty TSX companies growing consistently at a reasonable price

Searching for a healthy dividend yield

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What's up in the days ahead

The TSX closed at a record high Friday, as did the major U.S. indexes. Indeed, the best advice for Canadian investors over the past few years has been to stick close to home. But that may very well not be the case from this point forward. Ian McGugan in this Saturday's Globe Investor will explain why this is the ideal time to dip into emerging markets. And David Berman will tell us why the records being smashed in Toronto is another win for index investors.

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

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Compiled by Gillian Livingston

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