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Investment Ideas As an investor, don’t be afraid to flip-flop, and how alternative data could reap rewards for your portfolio

There are many deep thinking, highly intelligent people in finance and economics but few have the depth of knowledge, experience, and intellectual horsepower that form the basis of true wisdom.

Warren Buffett and Charlie Munger, Berkshire Hathaway‘s two-headed bastion of diligence and discipline, are obvious examples of objectively wise financial minds. London School of Economics professor Carlota Perez and Michael Mauboussin, head of research for New York-based BlueMountain Capital Management and finance professor at Columbia University, are two more.

Daniel Kahneman, 85-year-old Nobel Prize-winning psychologist is another. In a 2017 panel discussion, Mr. Kahneman made a number of interesting observations about human nature and one in particular is important for investors:

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“Ideas become part of who we are. People get invested in their ideas, especially if they get invested publicly and identify with their ideas. So there are many forces against changing your mind. Flip-flopping is a bad word to people. It shouldn’t be. Within sciences, people who give up on an idea and change their mind get good points. It’s a rare quality of a good scientist, but it’s an esteemed one.”

Investment ideas in our portfolios also “become part of who we are.” Once a new investment is made, we root for it like a favourite sports team or movie hero. To a significant extent, it becomes a reflection of our market knowledge and investment acumen. In other words, it can get personal.

A portfolio holding with a falling price requires a difficult emotional balance for investors. Panicked selling has historically been a bad strategy but on the other end of the emotional spectrum, stubborn refusal to admit an investment mistake can cause significant damage to overall returns for as long as the error remains in the portfolio.

My worst mistake was a large position in Juniper Networks Inc., a network equipment provider that competes with Cisco Systems Inc. (although not as well as I originally hoped). My thesis was that, with mobile data traffic doubling every three years thanks to the iPhone, all global communications companies would have to buy tons of new equipment to manage the information load.

It took almost a decade to admit my brilliant idea wasn’t working, and I wound up taking a significant loss. The direct hit to the portfolio value was bad enough, but there was also opportunity cost – the amount I could have made if I’d sold the stock earlier and bought something that actually went up.

There are two ways to avoid holding a bad investment too long, one mechanical, and one subjective. The mechanical method is a stop-loss order. This involves setting a price below the purchase value that, if hit, generates a no-questions-asked sell. This locks in a loss, but a smaller one that might occur if denial and pride result in a longer holding period.

The other more subjective method is to consistently ask “Is this still the stock I bought?” This involves consistently judging performance versus the original investment thesis. In Juniper’s case, I should have recognized that profits and the stock price were not rising along with rapid growth in mobile data traffic.

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It’s not easy to take emotion out of the investing process but the resulting objectivity can be extremely helpful to the results. Following Mr. Kahneman’s advice – giving ourselves credit for changing our minds – is an excellent start.

-- 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 or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Teck Resources Ltd. (TECK-B-T). This stock that appears on the positive breakouts list (stocks with positive price momentum). This stock has 19 buy recommendations with an “action list buy” rating from the analyst at TD Securities and a “focus stock” call from the analyst at Scotiabank. The company has a number of potential catalysts ahead that may lift the share price further. For instance, mid-year, the company may announce a potential special dividend or share buyback. The stock is trading at a reasonable valuation with an anticipated one-year price return of over 15 per cent. Teck is a diversified resource company with a focus on commodities including coal, copper and zinc. Jennifer Dowty reports (for subscribers).

The Rundown

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The data game: How information on everything from flight patterns to parking lots can reveal valuable clues about where the market is heading

Taking a look at where company jets are landing (such as repeated visits to a rival’s neck of the woods) can hint that a deal is in the works and more. Tim Shufelt reports about Quandl Inc., a Toronto-based startup which can track the movements of thousands of corporate jets around the world, giving investors a new advance signal of potential market-moving corporate deals. (for subscribers).

Dividends and buybacks: A stock picking strategy that takes both into account for producing superior returns

John Reese takes a look at what shareholder yield is, and why that’s a better measure than dividend yield to judge if a stock is a good investment.

A conservative investor with lots of cash and bonds wonders if she’s overpaying her adviser

The fee-based investment advice trend can be problematic for conservative investors with portfolios full of safe investments that require minimal advisory oversight. Rob Carrick takes a look at how much is too much to pay in fees with a conservative, easy-to-manage portfolio (for subscribers).

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How a climate-change investing strategy can help you beat the market

Let’s say you don’t care about climate change, you loathe government carbon taxes and you can’t stand the idea of wind turbines dotting the landscape. Is a climate-change investing strategy still worth considering? David Berman stakes a look (for subscribers).

Why this could be an ideal time to sell Canadian utility stocks and buy financials

Merrill Lynch quantitative strategist Savita Subramanian has a new trade idea – sell U.S. utility stocks and buy U.S. financial stocks – for a potential gain of 20 per cent in the next 12 months. Could this trade also work for Canadian stocks? The answer, while not unequivocal, is a likely yes, although with lower potential returns. Scott Barlow investigates (for subscribers).

Are you an aggressive investor? These ETFs are for you

Gordon Pape takes a look at some Canadian-based exchange-traded funds (ETFs) suited for aggressive investors that are chasing gains (for subscribers). (Here’s his picks for different investors.)

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Canadian stock market is a bin of bargains

The Canadian stock market is up 20 per cent from its Christmas Eve low. Despite the gain, it appears to be reasonably valued. Looking at the exchange sector by sector reveals a bin of bargains. The tech and consumer staples sectors look expensive but the other sectors including real estate and financials look relatively cheap. He also picks the cheapest stock in each sector. (For subscribers).

Others (for subscribers)

The four biggest questions, and answers, for equity investors

Canadian rental costs leap higher in the largest increase since 1992

Seven winning dividend stocks that tap into sports equipment, retailers

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Strong stock and bond markets at odds over global growth

Monday’s Insider Report: A $99-million trade in this Canadian large-cap stock

Monday’s analyst upgrades and downgrades

Monday’s small-cap stocks to watch

Others (for everyone)

Seniors find an unconventional way to supplement retirement income – as film extras

A better way to improve TFSAs than restoring the annual contribution limit to $10,000

The Globe’s stars and dogs for last week

BlackRock strategists advocate trimming investment portfolio risk

Ask Globe Investor

Question: What do you think of the Canoe EIT Income Fund (EIT.UN)? It pays a very good yield of 10.4 per cent.

Answer: When an investment pays a double-digit distribution, it’s imperative to dig deeper. If you go to Canoe EIT Income Fund’s website and look under “asset mix," you’ll see that nearly 70 per cent of the fund’s assets consist of Canadian and U.S. equities. The rest is largely cash and international stocks.

You might well ask: How can a fund can pay a distribution of more than 10 per cent when the assets it owns don’t yield anything close to that? To find out, let’s look under “tax information” on the fund’s website.

In 2018, the closed-end fund distributed 10 cents a month, or $1.20 in total. Of that, just 4.7 per cent consisted of eligible dividends, 48.7 per cent was realized capital gains and the remaining 46.6 per cent was return of capital, or ROC.

ROC is defined as the portion of a distribution that does not consist of dividends, interest or realized capital gains. A small amount of ROC is usually no cause for concern. But when ROC gets very large, it can exert a drag on a fund’s unit price. If you look at a long-term chart of EIT.UN you’ll notice that the units, which closed Friday at $11.52, are trading below their market price of more than $12 five years ago. So, yes, investors have collected a juicy distribution, but they have effectively subsidized that high yield with a falling unit price.

Read the rest of John Heinzl’s answer here (for subscribers).

--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

Ian McGugan takes a look at why the market has done better than the economy over a number of decades and a former teacher explains how he is using dividend reinvestment plans to boost his retirement income.

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

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Compiled by Gillian Livingston

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