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Some 15,000 pieces of pipe for TransCanada Corp's Keystone XL pipeline lie in a field in North Dakota in this file photo.

The Globe and Mail

Berkshire Hathaway's Charlie Munger has been a ceaseless and helpful quote machine for investors during the majority of his 94 years on the planet. One of his better-known pieces of advice is to 'always invert' when faced with a business challenge – ask the questions in reverse as well as conventionally.

The best example of inversion I can remember concerns a company looking to increase productivity. Mr. Munger was fine with the process of looking for new ways to improve, but also suggested that management ask 'What are we doing now that's stopping us from getting better?"

This is a very helpful process for investors. Sell-side research is happy to provide a myriad of reasons to buy a stock, but investors should supplement this structural optimism by listing all of the reasons the investment could go wrong. Your broker, by the way, is unlikely to be helpful with this.

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Inverting also applies to market strategy. In a March 1 report, Merrill Lynch quantitative strategist Savita Subramanian noted that when interest rates climbed, stocks followed them higher 90 per cent of the time. We can accept the historical patterns indicating that rising rates don't immediately mean the bull market is over, but can also look for reasons that the usual precedents might not apply this time.

The demographics-led desperation for yield and income could makes things different. With a much larger percentage of the investing population stuffed into dividend and income instruments, equity markets are likely to be more negatively affected by rising rates than in previous inflationary periods.

Ms. Subramanian, no raging bull, also noted in the same report that "the S&P 500 is statistically expensive on almost every metric we track."  High valuation levels could also limit upside for equities.

For the time being, I believe equity markets have further to climb despite rising rates. Strong earnings growth will help reduce price earnings ratios, and the same hunger for income that causes risk in dividend stocks will result in government bond buying, keeping yields from rising too quickly.

I wound up in the same place as Ms. Subramanian's conclusion, but still believe Mr. Munger's process of inversion is an extremely helpful one for investors.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.

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Stocks to ponder

Canopy Growth Corp. (WEED-T). This stock may reappear on the positive breakouts list in 2018 as there are several catalysts ahead for the company. Ontario-based Canopy Growth is a market leader in the Canadian medical cannabis industry that is well-positioned to experience exponential growth in upcoming years. Jennifer Dowty reports.

Sleep Country Canada Holdings Inc. (ZZZ-T) Sleep Country Canada Holdings Inc. has prompted very different reactions with its past two quarterly financial reports, suggesting that investors aren't quite sure what to make of the mattress retailer. After Sleep Country released its third-quarter financial results in November, the shares plunged 13 per cent in one day, amid concerns about slowing growth, missed profit targets and rising costs. But last Friday, after the company released its fourth-quarter results, the opposite reaction unfolded: The shares jumped more than 15 per cent, driven by better-than-expected profit and a strong gain in market share. Feeling whipsawed? Then take Friday's rally as a clear indication that Sleep Country is riding a wave of momentum that is unlikely to falter any time soon. David Berman reports.

New Flyer Industries Inc. (NFI-T). North America's largest transit bus and motor coach manufacturer and parts distributor, New Flyer Industries Inc., has seen its share price travel to a record high in January. The company's President and Chief Executive Officer Paul Soubry recently spoke with The Globe to discuss the potential impact from tariffs, NAFTA, and his business strategy. Here is why Mr. Soubry believes the company can capture further value for its shareholders down the road. Jennifer Dowty interviewed the CEO. 

BRP Inc. (DOO-T). This company appeared on the negative breakouts list last week. Operationally, the company is delivering solid results. However, the share price is in correction territory, declining 14 per cent since its closing record high set on Feb. 13. The big issue for the company is what might happen to NAFTA, the North American free trade agreement. Jennifer Dowty reports.

The Rundown

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In Trump's tariff war, it's the U.S. that will be in the crosshairs

Donald Trump has picked up a loaded revolver. What he doesn't appear to realize is that he's aiming it at his own head. The tariffs he is threatening to impose against imported steel and aluminum are likely to cause just as much pain for U.S. companies, U.S. workers and U.S. investors as the international trading partners that Mr. Trump thinks he's targeting. Ian McGugan reports.

The amateurism at the White House is absolutely astonishing

Donald Trump and his band of protectionists need to enroll in an Econ 101 course – there are few 'winners' in a trade war. They will then be able to learn some basics like 'Harberger's triangle', an area of the supply-demand diagram of tradeable goods depicting the size of the 'deadweight loss' to society from what is otherwise a tax on global production and U.S. consumption. If you are not one of the 400,000 workers in the steel or aluminum industry, you should be up in arms about this. David Rosenberg outlines his view.

Industry pioneer Som Seif says he's preparing for ETFs to become obsolete

Canadian ETF entrepreneur Som Seif plans to announce an acquisition and new minority partner as soon as this week as he works to quintuple assets at his latest venture. Seif built Claymore Investments Inc. into one of Canada's first exchange traded fund companies. It had $8-billion in assets when he sold it to a Canadian unit of BlackRock Inc. in 2012 for an undisclosed sum. As he works to bolster his new firm he's also preparing for a day when new technologies, including cryptocurrencies and blockchain, might make ETFs obsolete. Bloomberg reports.

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Mattress to motor coach stocks in favour as Canada investors steel for trade wars

Canadian fund managers are crunching numbers to trade-proof their portfolios, as the threat of U.S. tariffs boosts the appeal of domestic-focused names and shares of companies that have production capacity in the United States. Reuters reports what stocks they are buying.

Good news for market bulls: Stock buybacks have returned in both Canada and the U.S.

Buybacks are back, in a big way. Teeming with cash from soaring profit and tax reform, U.S. corporations have started on a stock-buying spree, devouring their own shares at a record pace. There are early indications of a rise in domestic buybacks, as well, although Canadian data is not as readily available. For a stock market grappling with new economic and political risks and struggling to move on from the recent correction, a sustained rise in corporate share repurchases could provide a crucial support for equity prices. Tim Shufelt reports.

Why we may be seeing just the start of lower industrial metals prices

'Synchronized global recovery" is a phrase that has become ubiquitous in research reports, indicating a trend with significant bullish implication for industrial metals prices. With more global economies, both emerging and developed, enjoying accelerating growth rates, demand for metals was expected to spike higher. Recent data, notably a slowdown in the rate of global manufacturing, are providing signs this trend is flagging. Scott Barlow explains using charts.

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Regulators fiddle while investors burn over fund fees at discount brokers

Regulators are moving at a snail's pace at examining the millions of dollars in fees that discount brokerages are charging for advice they do not provide. About 83 per cent of mutual funds sold through discount brokerages in Canada include trailing commissions that are typically charged by financial advisers for the advice they provide. Of the total $30-billion in assets held in mutual fund products in discount brokerages, more than $25-billion remain in fund series that bundle an advice fee within the product, according to a paper released in January, 2017, by the Canadian Securities Administrators (CSA) that discussed the topic of discontinuing embedded commissions. Clare O'Hara reports.

How an average anxious investor can absorb volatile markets

If you weren't paying attention – and really, if you're reading this you surely have been – you would barely know what a wild month February was for investors. In a period of just two weeks, the Dow Jones Industrial Average dropped more than 3,200 points, or 12 per cent of its value, before racing back to recover about two-thirds of those losses. It was a white-knuckle ride and when February's dust settled, the Dow's losing month had snapped a 10-month win streak. Opinions on what caused the dramatic plunge-then-recovery abound (inflation, interest rates, tax cuts, Trump), but most can agree on the shared anxiety it created. Stephanie Bank explains.

Forget real estate. It's wine that has produced some of the best returns for investors

With stock and bond markets looking so glum, maybe it's time to stock up on wine. No, not for drinking. For investment. Wine, art and musical investments have offered better returns than cash or government bonds since 1900, according to the most recent edition of the Credit Suisse Global Investment Returns Yearbook. On the other hand, housing – the favoured investment of most Canadians – looks like an outright dog. Ian McGugan takes a look at the trends.

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Top Links

Is the Canadian economy really 'past the point of no return'?

Global oil supply outlook: Feast, then famine


Monday's Insider Report: Companies insiders are buying and selling

Tuesday's Insider Report: Companies insiders are buying and selling

The Globe's stars and dogs for last week

Number Crunchers

Fifteen value stocks that show positive price momentum

Ask Globe Investor

Question: A while ago I bought the iShares U.S. High Dividend Equity Index ETF (CAD-Hedged) for my registered retirement savings plan. However, I was shocked when the ETF (XHD-T) fell precipitously at the start of 2018, and had another fall since. These moves have been out of step with the general markets. Can you explain what happened?

Answer: You are correct that XHD has underperformed the market. Through Feb. 28, it posted a total return – including dividends – of negative-4.89 per cent, according to the iShares Canada website.

That compares with a positive total return of 1.28 per cent for the iShares Core S&P 500 Index ETF (CAD-Hedged) and 1.83 per cent for S&P 500 Total Return Index. A few factors could explain XHD's sluggish performance. First, the fund focuses on dividend stocks, which have struggled as interest rates have jumped recently.

Second, it has high weightings in certain stocks, such as Exxon Mobil Corp. (8.5 per cent), AT&T Inc. (8.5 per cent), Verizon Communications Inc. (6.4 per cent) and Chevron Corp. (5.4 per cent), all of which have lagged the market in 2018. It's also possible that currency hedging – which is never perfect – may have exerted a drag on XHD's returns.

With the plethora of U.S. dividend ETFs available, you may be able to find a more suitable fund. In my model Yield Hog Dividend Growth Portfolio, for example, I hold the iShares Core Dividend Growth ETF (DGRO). Diversification is excellent – it has 456 holdings and the highest-weighted company (Microsoft Corp.) accounts for just 3.3 per cent of the fund.

The management expense ratio of 0.08 per cent – compared with 0.3 per cent for XHD – is also attractive. DGRO trades in U.S. dollars on the New York Stock Exchange, which means Canadian investors could face currency-related costs when buying and selling the fund, but there can be tax advantages to holding a U.S.-listed ETF in an RRSP, as I discussed in a recent column.

--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

John Heinzl is buying more shares in Algonquin Power & Utilities for his Yield Hog dividend growth portfolio. He'll explain why in Tuesday's Globe Investor. Meanwhile, Rob Carrick will explain why savers aren't benefiting from recent Bank of Canada rate hikes.

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

More Globe Investor coverage

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Compiled by Gillian Livingston

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