Mutual fund analyst was a fantastic job with its near-unfettered access to great portfolio managers and Leafs ticket perks, but I stopped doing it when I realized most people weren’t listening.
We were using an analytical model that was effective in finding funds that, in risk-adjusted terms performed best over a full market cycle. The brokers the recommendations were designed for, however, were ignoring them in favour of the previous year’s top performers. The Sprott funds were the big sellers at the time even though they were far too volatile for us to recommend.
I understood why this was happening – it’s more attractive to buy an investment that is outperforming versus one that should, maybe, in the future generate market beating returns. Still, experience underscored two common dilemmas of investing – chasing rallies/herding and the human brain’s unwillingness to forgo short term satisfaction for longer term benefits.
The indispensable Psy-Fi blog, which details all of the psychological biases that prevent us from becoming good investors, described herding in unflattering terms, “investors are generally a bovine group when not in asinine mood, [and] will tend to congregate in herds and then charge about randomly, often over the edge of the nearest cliff.”
Multi-billionaire George Soros frames the phenomenon in a slightly different way with his theory of reflexivity. In simple terms, this involves a strategy of finding market segments where herding behaviour is evident, participating in the rally, and getting out before it collapses. Few individual investors can expect to apply Mr. Soros’s strategy productively. Stanley Druckenmiller, a Soros protégé who made billions himself, called Mr. Soros "the greatest [asset] seller of all time" and mimicking his success is in some ways like trying to effectively copy Wayne Gretzky’s passing skills.
Market rallies, even those combined to individual sectors, are clearly good things and investors can benefit. But they should be aware at the same time that the longer rallies continue, the more danger their portfolio is in. Warning signs like stratospheric valuation levels should be taken seriously and it’s better to leave the party early than late to protect longer term returns.
Stocks to ponder
Equitable Group Inc. This stock has surged more than 20 per cent since the company reported its quarterly results last Friday, and many observers believe the stock is still worth a look, writes David Berman. Equitable Group, which controls Equitable Bank and is largely a mortgage lender, is a fraction of the size of Canada’s Big Six, with a market capitalization of just $1.2-billion. But its fourth-quarter results, and the reaction from the market, suggest that its small size may be a virtue.
Gildan Activewear Inc. This company's quarterly financial results and update on its recent American Apparel acquisition are giving investors a good reason to look again at this previous high-flying stock, writes David Berman. The shares rose 1.8 per cent on Thursday, after slumping to two-year lows earlier this month. The move follows the release of upbeat fourth-quarter results that suggest the apparel maker may be regaining some lustre.
AltaGas Ltd. In this year of sesquicentennial, what better way for a Canadian company to boost its dividend-paying abilities than to snap up a U.S. outfit that’s been making payouts to its investors since the years before Confederation? AltaGas Ltd. probably didn’t consider the issue quite that way when it agreed to buy WGL Holdings Inc., a Washington gas utility with a dividend streak dating back 166 years. WGL’s payout power, however, will make AltaGas one of the top yield names in Canada, writes David Milstead. And yet, investors are sending lukewarm feedback about the deal.
Boardwalk Real Estate Investment Trust. Unfortunately, Boardwalk is facing deteriorating fundamentals that are pressuring its unit price, writes Jennifer Dowty. The REIT has realized a triple whammy with three main challenges sending unitholders for the exit door in search of other investment opportunities with near-term upside potential.
Enerplus Corp. This company was the top performing stock in the S&P/TSX composite energy sector index in 2016, and the third best performing stock in the S&P/TSX composite index last year, writes Jennifer Dowty. Despite is phenomenal rally in 2016, analysts remain bullish and expect the positive price momentum to continue for the stock.
Freshii Inc. This company was recently listed on the Toronto Stock Exchange, and the consensus estimate implies a modest double-digit potential gain, writes Jennifer Dowty. However, given the company’s strong growth track record, projections may prove to be conservative. The stock began trading on the Toronto Stock Exchange on Jan. 31, 2017. The share price has rallied 29 per cent from its initial public offering price of $11.50.
Enbridge Inc. This company that appears on the negative breakouts list, writes Jennifer Dowty. The company offers investors a yield of 4.3 per cent and management is firmly committed to its dividend, raising it for 22 consecutive years. The upcoming merger with Spectra Energy Corp. is expected to be completed next week making the company a leading North American energy infrastructure company.
Three key questions to answer before rushing into U.S. stocks
You can call it cognitive dissonance or you can call it being blind to the numbers. Both terms are apt descriptions for today’s lemming-like rush into U.S. stocks, writes Ian McGugan. David Kostin, chief U.S. equity strategist at Goldman Sachs, prefers the term cognitive dissonance and uses it to describe the growing chasm between rising U.S. stock prices and falling profit forecasts. Investors and managers are growing increasingly optimistic at exactly the same time as analysts are reining in expectations for 2017, he writes in a note. The result has been a 10 per cent increase in the S&P 500 index since the U.S. election despite a 1-per-cent decline in consensus forecasts for earnings per share.
Ranks of stock analysts dwindle as markets shift, demand ebbs
The ranks of stock analysts around the world are thinning out, as the trends in investing shift away from the business of sell-side research, writes Tim Shufelt. Dwindling head counts at the world’s top stock-research shops suggest an industry in slow but steady decline, beset by tighter regulations, low profits, heavy competition and reputational challenges. This may not come as a huge disappointment to those who see the whole undertaking of sell-side research as ethically compromised.
Canadian bank stocks may be positioned to play catch-up
Remember when Canadians were laughing at the large number of foreign investors who were short selling Canadian bank stocks and using the resulting funds to buy U.S. bank stocks? We should stop doing that – this two-sided bet on U.S. bank outperformance of domestic bank stocks has been extremely profitable for them, writes Scott Barlow. Recent trends, however, imply that Canadian bank stocks may be about to play catch-up.
Larry Berman: Why interest rates won’t likely rise much
The one thing that has never changed in 30 years of ups and downs in equity markets is the disinflation trend and that on average interest rates have been declining, writes Larry Berman. Government debts are rising, growth is stagnant and the population is aging. All these macro trends tell me that interest rates are likely to stay low for decades to come because we cannot afford for them to go up.
Gordon Pape’s mailbag: Why hold bonds when rates are rising and more
Gordon Pape answers readers' questions about bonds, transferring stocks, MERs and TFSAs.
Gordon Pape: My growth portfolio has delivered annual growth of over 25%
This is the riskiest of all of Gordon Pape's portfolios, with 100-per-cent exposure to the stock market. It also continues to be the most successful in terms of returns, he writes.
How to get the financial advice you really want
Canadians are increasingly becoming aware of how financial advice and the sale of investment products are intertwined, and they’re rebelling, writes Rob Carrick. I see the rebellion in action in my e-mail in basket all the time from people asking me where to find a fee for service financial planner. That’s someone who charges a flat or hourly fee for advice and doesn’t sell products. He explains how to find a fee-for-service adviser.
Planning ahead: Some day, your financial adviser will retire, too
Adrian Mastracci wants to make one thing clear: he’s not retiring any time soon. However, the 69-year-old portfolio manager is making plans for when that day eventually comes, writes Brenda Bouw. Mr. Mastracci’s KCM Wealth Management recently joined forces with another Vancouver-based independent investment advisory and portfolio management firm, Lycos Asset Management, and its 40-something money managers, Constantine Lycos and Steve Nyvik. Mr. Mastracci took his time finding a firm he considered to be a good fit with KCM, which he started in 2000. He was looking for colleagues that his clients could feel comfortable working with if he were to get sick, go on an extended vacation or for when he does stop working some day.
Ask Globe Investor
What is the advantage for a company to borrow money by issuing preferred shares compared to other forms of borrowing given that dividends are paid with after-tax dollars?
Preferred shares are not a form of borrowing or debt like a bond. While they share some characteristics with bonds -- such as fixed payments and sensitivity to interest rates -- preferred shares qualify as equity financing. It’s true that preferred dividends are paid from after-tax earnings -- and therefore do not offer the same tax advantage as interest, which is tax deductible -- but preferred shares offer several benefits for a corporation. For one thing, if a company misses an interest payment on a bond, it can face default and possible bankruptcy. With preferred shares, dividends can be suspended during times of financial difficulty (although the company may have to later make up for missed dividends in the case of cumulative preferred shares). Issuing preferred shares, as opposed to debt, also has the benefit of lowering the company’s debt-to-equity ratio -- a measure that investors watch closely because it reflects the financial strength and flexibility of the company. Still another benefit of preferred shares is that, given that preferred dividend yields are generally higher than yields on bonds or common shares, retail investors often have a healthy appetite for these securities.
-- John Heinzl
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What’s up in the days ahead
On Saturday, Rob Carrick gives Gen Y investors a guide on how to get started, and four simple portfolios they can follow; and John Heinzl looks at the best way to implement a dividend reinvestment plan (DRIP). On Monday, Scott Barlow looks at the relationship between retail spending and housing prices, and whether what the charts say means a correction in housing prices; Tom Bradley talks about how to make investing simpler; and John Reese looks at six stocks that may benefit from the rotation toward more main street kind of stocks.
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