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Investment Ideas The secret of great investors, be wary of TSX bank stocks, and a way to profit from a housing downturn

A Royal Bank of Canada logo is seen on Bay Street in the heart of the financial district in Toronto.

© Mark Blinch / Reuters

Warren Buffett's quote about his investment style being 'simple, but not easy' is a cliché in two ways. One, everyone's heard it. Two, despite this, almost no one can apply it consistently.

Motley Fool's Morgan Housel provided a good example of advice, well-grounded by research, towards a simple but easy investment strategy on social media, "Double your average holding period. If you normally hold stocks for a year, make it two. Three years? Go for six. You'll get better results."

There is good guidance on investing and trading, for a variety of investment approaches, everywhere in the Internet age – enough so that there isn't much of a premium on it. Yet analysis shows most active investors, professional and private, underperform their respective benchmarks.

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There's no shortage of good advice. The scarcity – and I fall short on this as often as anyone – involves discipline and consistency, not just having a plan but sticking with it no matter how much pain the process causes over shorter time frames. This is the secret of most great investors and it sucks that human psychology makes it so hard to emulate.

-- Scott Barlow

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Stocks to ponder

Canadian Imperial Bank of Commerce. Investors should proceed with caution on CIBC, writes Jennifer Dowty. The second quarter earnings season for Canadian banks will kick off in three weeks. Bank stocks have failed to deliver meaningful returns for investors so far this year. Among the 'Big 6' banks, Royal Bank of Canada leads the pack with a year-to-date gain of just 2.1 per cent. CIBC will release its second quarter financial results on May 25. The Street is expecting earnings per share of $2.57.

GreenSpace Brands Inc. This acquisition-hungry organic and natural food company is attracting more interest from investors amid a steady consumer shift toward healthier eating, writes Brenda Bouw. Shares of the Toronto-based company, behind brands such as Love Child Organics, Central Roast, Nudge and Rolling Meadow Dairy, are up more than 65 per cent over the past year. The company has an $80-million market cap and is covered by seven analysts, all of which have a "buy" recommendation on the stock, according to Bloomberg. The analyst consensus price target for GreenSpace Brands over the next 12 months is $2.12, implying a premium of 40 per cent from the current share price of about $1.50. Analysts like the company for its established brands and growing list of potential takeover targets in the health-food space.

Canadian Tire Corp. This stock has rallied sharply after reporting results for the past six quarters, writes Jennifer Dowty. Looking back over the past six quarters, the daily returns on its reporting day are as follows, starting with the most recent quarter: 6.9 per cent, 4.3 per cent, 4.4 per cent, 4.5 per cent, 7.8 per cent, and 2.1 per cent. Strong same store sales growth, dividend increases, and share buybacks have helped drive the share price higher.  The average 12-month target price is $174.69, implying the share price has 5 per cent upside potential over the next year.

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Theratechnologies Inc. This stock is up 149 per cent with a near-term catalyst that may extend the rally, writes Jennifer Dowty. While the stock price appears due for a pause after rallying 149 per cent year to date, the positive price momentum may continue given the company's robust growth profile appears intact. One of its drugs, done with a partner, could get approval later this year, the company said. The average 12-month target price is $7.96, implying the share price has over 16 per cent upside potential over the next year.

The Rundown

The one thing standing in the way of Home Capital's stock going to zero

Investors who have been betting against Home Capital Group Inc. are buoyed by the bad news that has pummelled the alternative mortgage lender's share price by more than 70 per cent this month. Bad brokers? Regulatory investigation? Executive departures? Run on the bank? Desperate terms for a financial lifeline? Home Capital has it all. But the one element that would complete their investment thesis is still missing: Ontario's housing market is red hot, which provides some confidence in Home Capital's mortgage book.

Wanted: A fund manager who says 'I goofed'

As controversy swirls around Home Capital Group Inc., some of Canada's sharpest investors are finding interesting ways to explain how bright, insightful people such as themselves could dance into a big, stinking mess, writes Ian McGugan. In fact, the trouble at Home Capital appears to have given rise to an entirely new art form: the non-apology apology. This consists of a fund manager explaining why his decision to pour money into the mortgage lender wasn't really an error. Fund managers, of course, have always had to justify decisions that didn't pan out, but what makes the setback at Home Capital particularly tough to wave away is that the lender has long been regarded as a dicey bet on Canada's increasingly frothy housing market.

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How to protect your finances against real estate contagion

Too much exposure to real estate can be toxic to your financial health. So do a personal inventory right now to see how much of your net worth is tied to the housing market. It's not just your house. We've seen lately how your savings and investments can also be affected by what's happening in the housing market. Housing has carried the Canadian economy for years, but there are signs of stress that go beyond the debate about how big a bubble the real estate market in Toronto and surrounding cities is.

An easy way to profit from a housing downturn

The question of how to profit from a housing downturn may have a simpler answer than you expect, writes Rob Carrick. Based on the stock market impact of the Home Capital situation, there's evidence to suggest that bonds might just do it.

Thinking of buying TSX bank stocks while they're down? Don't

The S&P/TSX bank index is lower by 7.6 per cent from the March 6 highs, thanks in large part to apocalyptic real estate scenarios, but the sector is not yet compellingly valued, writes Scott Barlow. In May, 2016, Merrill Lynch equity and quantitative strategist Savita Subramanian published a massive, vital, 240-page report identifying the valuation methodology that works best for each individual market sector. Among the findings was that forward price-to-earnings ratios (the "earnings" part based on 12-month analyst consensus), not the more widely used price-to-book ratio, is the best predictor of bank stock performance. Right now, these indicators are suggesting investors better not buy on the dip.

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Ask Globe Investor

Question:  I'm 71 and I will be taking RRIF payments this year. My TFSA is maxed out. I've started investing outside my registered plans. What are the most tax-effective investments?

Answer: There is a wide range of tax-effective securities from which to choose including REITs, limited partnerships, preferred shares, and Canadian dividend-paying common stocks. Some mutual fund companies also offer tax-effective funds, such as the Nexgen line from Natixis Global Asset Management.

While all these securities are tax effective, some are more so than others. Eligible dividends (those paid by large companies) are the best bet if your total income is relatively low. Because of the way the dividend tax credit is calculated, the effective rate for someone with an income of under $45,000 is under 10 per cent in most provinces.

-- Gordon Pape

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

John Templeton, the great value investor, famously said that the four most expensive words in the English language are, This time, it's different. But what if, this time, he's wrong? Maybe the economy isn't going back to its old ways any time soon. Maybe markets aren't going to revert to historical patterns in short order. If so, it's possible that we're in a new investing era, one in which frothy stocks will go on being frothy for years to come. This weekend in Globe Investor, our Ian McGugan will explore this possibility in-depth.

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

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Compiled by Gillian Livingston

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