Michael Mauboussin is among my favourite thinkers on markets. He is currently director of research at BlueMountain Capital Management and a lecturer at Columbia University. His past resume includes Chief Investment Officer at Legg Mason Funds and a director of research position at Credit Suisse. Mr. Mauboussin is also chairman of the board for the Sante Fe Institute which bills itself as the 'world headquarters for complexity science' but can also be described as an extended summer camp for the planet's smartest people in multiple academic disciplines.
I recently came across a mid-2017 podcast where Mr. Mauboussin was the guest of quantitative hedge fund manager Patrick O'Shaugnessy. The 90 minutes provided an extraordinary wealth of information on issues ranging from the three most important ways the rise of index investing has changed equity markets, the sharp reduction in new stock listings, and how companies build competitive moats that provide sustained outsized profitability.
For me, the most interesting segment involved the relative importance of investment fees versus the Behaviour Gap. Applied to finance, the behaviour gap describes the difference between what an investors intends to do, and what actually happens in their portfolio. An investor who, for instance, buys an exchange-traded fund (ETF) tracking the S&P/TSX Composite Index for the long term, and then fearfully sells the asset 18 months later after a 10 per cent correction, is exhibiting a behaviour gap.
Using U.S. data, Mr. Mauboussin describes how investor behaviour is on average more detrimental to performance than investment fees. He emphasizes that fee-consciousness is always a good idea for investors. But, he also notes that the average fee savings on passive versus active investing is 60 basis points per year (this number would likely be larger in Canada) when research shows that investors' emotionally buying and selling at the wrong times detracts 120 basis points from returns.
The behaviour gap occurs with all assets, so this isn't to single out passive investors. It is important to note, however, that even passive investors are usually not passive enough.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Canadian National Railway. (CNR-T). CN Rail's stock just slammed on the brakes. For long-term investors, this could be a good time to hop on board. Shares of Canadian National Railway Co. have fallen about 5 per cent in January and the company's disappointing fourth-quarter results are partly to blame. Even as fourth-quarter revenue rose 2 per cent to $3.29-billion, adjusted earnings per share of $1.20 came in below analyst estimates of $1.23. Management's guidance for EPS growth of 5 per cent to 8 per cent in 2018 also underwhelmed analysts, who cut their price targets on the shares. But for investors who believe in buying good companies when their shares are out of favour, CN is worth a closer look. John Heinzl explains why.
Stella Jones Inc. (SJ- T). On Tuesday, the TSX tumbled. But one notable exception to the downdraft was strength in the forest products sector. This is a stock from this sub-sector that may resurface on the positive breakouts list in 2018. Quebec-based Stella-Jones produces pressure treated wood products. It operates in relatively defensive industries serving the railroad and utility market segments. Jennifer Dowty reports.
CGI Group Inc. (GIB-A- T). This stock appeared on the positive breakouts list. The company has delivered strong gains to long-term investors. On Wednesday, the share price soared to close at a record high after the company reported solid quarterly results. Montreal-based CGI Group is the fifth largest independent information technology and business consulting services firms globally. The company provides consulting services, technological systems and solutions, and technology servicing outsourced from its clients. Jennifer Dowty reports.
Sypris Solutions (SYPR-Q). This stock is a technology and electronics provider based in Louisville, Ky., which focuses on the commercial vehicle and energy markets. SYPR has been in a downward spiral. Ten years ago, revenue was US$436-million. This past year, it touched down at less than US$92-million while last quarter it was just north of US$21-million. However, the company's two-year transition plan is moving toward its finish and it appears that most of the heavy lifting has been done, with positive results being achieved. The Contra Guys explain.
KuuHubb Inc. (KUU-X). With its focus on lifestyle applications and mobile video games geared to women, KuuHubb Inc. has been attracting a lot of investor attention since it went public last summer. Shares of the Finland-based, TSX Venture Exchange-listed company – whose properties including the Recolor digital colouring book, Neybers interior-design game and My Hospital medical-centre-simulation game – are up 7 per cent since they started trading on June 16 at $1.25. While the stock is considered high risk, analysts are bullish on KuuHubb's aggressive growth plans in the fast-growing mobile-gaming market and its lifestyle-category niche. Brenda Bouw reports.
Thomson Reuters Corp. (TRI-N, TRI-T). Thomson Reuters Corp. sold a slow-growing, less-profitable business for a wad of cash and plans to use the windfall to reduce debt and buy back a massive amount of stock. What's not to like? That was certainly the reaction as word of the deal leaked early in the week and shares roared to their highest level since October. But once the company revealed details of its plan to sell a 55-per- cent stake in its financial- and risk-data business to a consortium led by Blackstone Group LP, investors became troubled, with analysts and debt-rating agencies cutting ratings or initiating negative reviews. Thomson Reuters' shares began dropping – and hit a 52-week low on Thursday. It is a mysterious investor reaction, given the US$17-billion in cash headed to Thomson Reuters – and then mostly to shareholders in a stock buyback that is expected to be worth about US$10-billion. David Milstead reports.
New pot fund to take on Canada's most popular ETF of 2018
As investors' appetite for the burgeoning cannabis market continues to skyrocket, Canada's first actively managed marijuana-themed exchange-traded fund launched this week. Redwood Asset Management, a subsidiary of Purpose Investments – the company formed by Canadian ETF pioneer Som Seif in 2013 – began trading the Marijuana Opportunities Fund on Thursday. It is Canada's second cannabis-focused ETF. The first was launched last spring by Horizons ETF Management (Canada) Inc., but, unlike Redwood's offering, is not actively managed. Clare O'Hara reports.
Marijuana 'panic selling' spurs Canadian pot stocks meltdown
Investors' collective high over Canada's burgeoning marijuana industry has evaporated, to be replaced by a comedown. Marijuana stocks tumbled Friday amid a wave of "panic-selling" and concern that companies that had seen ballooning share prices recent are now overvalued. The BI Canada Cannabis Index plunged as much as 19 per cent, its biggest intraday drop on record, while the nation's biggest producers including Canopy Growth Corp. and Aurora Cannabis Inc. have tumbled more than 40 per cent from their January highs. Bloomberg reports.
The TSX is now oversold. Here is how investors should proceed
The S&P/TSX Composite skidded 2.1 per cent for the trading week ending with Thursday's close. The benchmark as a whole is now trading in the oversold, technically attractive zone according to Relative Strength Index (RSI). The current RSI reading of 28.5 is below the buy signal of 30, and the overbought, RSI sell signal of 70 is a distant memory. Scott Barlow explains.
A Fidelity star stock picker reveals where he's finding value right now
Joel Tillinghast, one of Fidelity's star stock pickers for more than 30 years, frequently travels abroad searching for the next hidden gem in small-cap companies. Next month he will be heading to Japan, a market where he continues to find value, while steering clear of today's investor frenzy around marijuana stocks and bitcoin. Most well-known for managing the Fidelity Low-Priced Stock Fund for U.S investors, Mr. Tillinghast began managing funds in Canada in 2002 with the Fidelity Northstar fund and later the Fidelity Global Intrinsic Value Class in 2015. Since inception, the value-class fund has seen a 14-per-cent annualized return and has more than $1.7-billion in assets under management, as of Dec. 31. Clare O'Hara reports.
Investing giant Vanguard launches 'one-ticket solution' ETFs
Taking a simple approach to investing does not make you a simpleton. So keep an open mind about some exchange-traded funds that began trading on Thursday on the Toronto Stock Exchange. A lot of new offerings in the smoking-hot ETF business these days are about trying to make clients feel smart by helping them invest in hot sectors or novel strategies. The three new balanced ETFs from the low-cost investing giant Vanguard wow you with a beautiful simplicity. Rob Carrick reports.
'Do you consider my bond ETF a loser?'
With assets of close to $1.8-billion and a history going back more than a decade, the iShares Canadian Corporate Bond Index ETF (XCB) is a well-established option for the fixed income side of a portfolio. But in a rising rate world, this and other bond ETFs are dead weight in a portfolio. Readers have been asking Rob Carrick if their bond ETFs are still worth owning. Here's his response.
It's the right time to get more exposure to life insurance stocks
Where does an income investor look when interest rates are on the rise? Try life insurance companies. Rising rates are usually bad news for interest-sensitive securities such as utilities, telecoms and real estate investment trusts. But, as with the banks, insurers fare much better when rates are on the rise. They not only offer the potential for capital gains but also respectable yields for the most part. Gordon Pape explains.
A simple timing strategy to reduce risk and volatility amid the market's galactic valuations
Norman Rothery takes a look at a simple timing measure. Each month, the current level of a stock-market index (including dividend reinvestment) is compared with the average of its 10 prior monthly readings. If the current reading is higher than the average, it's time to buy stocks. Otherwise, it's time to go to cash or some other safe asset.
Eight deep-value stocks that look particularly attractive as interest rates rise
Since the end of the financial crisis, growth stocks have crushed value names. Last year's dominant showing by the biggest tech companies and the strong start to this year by large-cap and growth stocks are just the most recent proof. The argument for the return to value is rational. Value stocks do well when the economy is revving up and interest rates are rising. Both of these conditions are truer now than they were even at the start of last year's 20-per-cent market gain. John Reese takes a look at eight stocks that are attractive in this environment.
How Canada's economist at large, Philip Cross, is investing his portfolio
Philip Cross worked at Statistics Canada for 36 years, rising to become the agency's chief economic analyst before departing in early 2012. Mr. Cross is now working on policy issues for several universities, think tanks and government organizations. He also frequently appears in the media as a commentator on the economy, and writes for various journals, magazines and newspapers across the country. Larry MacDonald recently spoke to him about his investment approach.
Ask Globe Investor
Question: Last year, I contributed $52,000 to a tax-free savings account (the maximum allowed cumulatively for the years 2009-2017). My investments have since dropped by $3,500 and my TFSA balance is now $48,500. If I make a withdrawal for the entire balance can I redeposit $52,000?
Answer: No. When you make a withdrawal from your TFSA, the amount withdrawn is added to your contribution room the following year. So, if you were to withdraw $48,500 now, this amount would be added to your contribution room on Jan. 1, 2019. The fact your TFSA was originally worth $52,000 is irrelevant. Also keep in mind that, as of Jan. 1, you received an additional $5,500 of contribution room.
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What's up in the days ahead
This Saturday, the Globe and Mail looks at who's getting rich off pot stocks and examines the sector's troublesome valuations.
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Compiled by Gillian Livingston