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U.S. based financial planner Johnathan Clements provided a useful summary of the dangers of individual stock picking, providing eight reasons why it’s not worth the trouble. Readers have heard a few of these before – the erosion of returns through fees, overconfidence , and the temptation to sell winners and hang on to losing bets are familiar to most investors.

Mr. Clements also describes two lesser-known and more interesting harmful tendencies among stockpickers. The first is ‘skewness’ which arises primarily from the finance media’s focus on outperforming stocks when the majority of companies underperform the index.

“Every year, a minority of stocks with spectacular performance drive the market averages higher, so most stocks end up lagging behind the averages, a phenomenon known as skewness… Like stories of winning lottery tickets, these huge stock market winners capture our imagination and make beating the market seem easy. But, of course, just the opposite is true: Only a small minority of stocks score these huge gains.“

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Mr. Clements also describes The House Money Effect which is particularly notable after the long market rally investors have enjoyed after March 2009.

“After our initial success, we might decide not just to continue hunting for big winners, but to take it up a notch – by allocating more of our portfolio to stocks and perhaps making even bigger bets on each stock we take a fancy to. Why this increased aggressiveness? At issue is a phenomenon known as The House Money Effect. Like casino gamblers who get lucky early in the evening, we may feel we’re ahead of the game financially and can afford to take even more risk.”

We can add the combination of skewness and media coverage, along with the house money effect, as two more examples of how perceptions and human psychology are ill-equipped to investing. Constant vigilance against conventional thinking and cold, objective thinking are required traits for successful 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.

Stocks to ponder

Surge Energy Inc. (SGY-T). This stock appears on the positive breakouts list (stocks with positive price momentum). The stock offers investors a combination of growth and income. Earlier this month, the company announced an accretive acquisition. In addition, the stock offers investors an attractive yield of nearly 4 per cent and the board may approve a proposed 25 per cent dividend hike. It has 11 buy recommendations and an expected price return of 37 per cent (over 40 per cent if you include the dividend yield). Calgary-based Surge Energy is an oil-weighted producer with operations in Alberta and Saskatchewan. Jennifer Dowty reports (for subscribers).

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PRO Real Estate Investment (PRV.UN-X). The unit price has dropped 5 per cent after management announced a recent financing with proceeds earmarked to fund recently announced acquisitions. The REIT is yielding 9 per cent; however, the payout ratio is currently above 100 per cent. Management expects cash flow to expand driven by recent acquisitions. Headquartered in Montreal, PROREIT is focused on building a portfolio of commercial properties located in primary and secondary (suburban) areas. Jennifer Dowty reports (for subscribers).

The Rundown

Pot-com: Canadian cannabis stocks experience a second wave of marijuana madness

Welcome to the second wave of marijuana madness. Gone are the days when it was notable for Canadian cannabis stocks to swing 10 per cent in a single trading session. Volatility has given way to chaos and inexplicable, manic activity in pot shares. Exhibit A is Tilray Inc.'s performance this week. With little more than US$20-million in revenue in 2017 and no indications that it will be profitable any time soon, the Nanaimo, B.C.-based cannabis producer went public on the Nasdaq at US$17 a share in July. By Tuesday, the stock was at nearly US$155. By midday Wednesday, its shares had rocketed to US$300 – marking a 17-fold increase from the IPO price. And then it crashed, closing the week at US$123. At its Wednesday peak, a company that few investors had even heard about two months ago was suddenly worth $36-billion, more than Sun Life Financial Inc., Loblaw Cos. Ltd and all but 17 publicly listed Canadian companies. “It’s a complete mania, total insanity,” said Stephen Takacsy, chief executive of Montreal-based Lester Asset Management. David Berman and Tim Kiladze report (for subscribers).

U.S. cannabis firms eye market debut in Canada

At least a dozen cannabis companies that operate in the United States are preparing to go public on Canadian stock exchanges, backed by local investment banks and law firms that have been hired to help them tap the market. The U.S. cannabis firms are working toward listing on Canadian markets in coming months, according to bankers and lawyers working with the companies and public statements from the firms. The list includes Massachusetts-based Curaleaf Inc., Harvest Enterprises Inc. of Arizona and Columbia Care LLC and Acreage Holdings, both of New York. Andrew Willis and Christina Pellegrini report (for subscribers).

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Trump’s trade war proves costly for investors, except in the United States

U.S. President Donald Trump’s escalating trade wars are taking a toll on investors around the world. Except in one place: the U.S. itself. Trade hostilities took another turn in an ugly direction last week: the United States and China engaged in a fresh round of competing tariffs, and negotiations in Washington again failed to deliver a new version of the North American free-trade agreement. The International Monetary Fund, among others, has warned that the trade disputes will soon begin to put a dent in global growth, and equity markets are responding. Most major euro zone stock indexes are down over the past three months; China’s markets have taken a sharp hit this year, with the Shanghai composite down more than 15 per cent. Tim Shufelt takes a look at which equity markets have been hit hardest by the trade war (for subscribers).

While U.S. stocks are sizzling now, Chinese stocks could be better long-term bet

Which would you rather own right now: U.S. stocks or Chinese stocks? The answer seems obvious. Wall Street has been hitting new highs, riding a red-hot economy. In contrast, the CSI 300 index of big Chinese companies has slumped more than 20 per cent since late January amid trade frictions with the United States. But this comparison isn’t quite as one-sided as it first appears. Investors who are betting everything on North America may want to consider the possibility that this is a better time to put money to work in Beijing than in New York. One excellent reason is that Chinese stocks are cheap. After their recent declines, they trade at multiples 40 per cent lower than their U.S. counterparts. Ian McGugan reports (for subscribers).

Gold sector struggles to attract investors, despite Barrick’s big promise

Even the most optimistic investors looking at Barrick Gold Corp.’s tie-up with Randgold Resources Ltd. must ask themselves an uncomfortable question: Can a big merger actually resurrect the gold industry? Executives from both sides, understandably, spent Monday talking up the benefits for their respective firms. Barrick gets a respected management team that avoided the billion-dollar mistakes and write-downs that have plagued the gold industry. Randgold, whose mines are in Africa, gets its hands on a large and diversified asset mix – including some prime properties in safer jurisdictions such as Nevada. Their hope is that investors will appreciate the combined company’s scale. Tim Kiladze explains (for subscribers). You can also take a read of what analysts are saying about the blockbuster Barrick-Randgold deal.

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Investor advocates urge Ontario to allow mutual-fund fee reform

Battle lines are being drawn over early withdrawal fees for mutual funds. While investor advocacy groups are urging the Ford administration to reconsider its opposition to fee reform, several investment companies are applauding the Ontario government’s move to block such reform. The Canadian Securities Administrators (CSA), an umbrella group for provincial securities watchdogs, proposed changes on Sept. 13 that would prohibit the fees, known as deferred sales charges (DSCs). Shortly thereafter, Ontario Finance Minister Vic Fedeli released a statement opposing the recommendations, throwing into doubt any regulatory action that might follow a six-year study that included public consultations, research papers and support from all provincial regulators. Clare O’Hara reports.

This is why you don’t stand a chance against the big guns of investing

Robert Tattersall says individual investors are at a disadvantage to professional investors who have a mountain of data and other tools at their disposal. His advice? Go with exchange-traded funds for the bulk of your investment portfolio and save your research for key small-cap stocks.

My growth portfolio has gained over 27% annually, but it’s time to make adjustments

Gordon Pape takes a look at his model growth portfolio and how it has done in the past six months, and what might need to change.

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Should I pay down my mortgage or invest in my TFSA?

A reader wonders if investing in his TFSA is a better move than paying down his mortgage. This investment portfolio outlines the dollar and cents of how you need to look at your asset allocation as you make this kind of decision. Here’s Benjamin Felix’s view.

A dividend ETF built for rising interest rates

Rising interest rates and Canadian dividend ETFs don’t mix well. Exchange-traded funds holding Canadian dividend stocks are good income-producers in any market environment, but their share price tends to underperform the S&P/TSX composite at times when interest rates are in a rising trend. The reason is simple: Canadian dividend ETFs tend to have higher weightings in three rate-sensitive sectors – utilities, telecom and real estate – than the broader index. A new ETF from a new player in the sector, Fidelity Investments Canada, offers an opportunity to stay invested in dividend stocks while minimizing the negative effect of rising rates. The Fidelity U.S. Dividend for Rising Rates Index ETF (FCRR-T) is built differently than Canadian dividend ETFs. Rob Carrick reports (for subscribers).

Manulife Financial offers to pay people to leave a retirement product that was once a sensation

If you’re part of the crowd who put money in Manulife Financial Corp.’s IncomePlus guaranteed retirement income product after it debuted in 2006, watch your mail for a surprising offer. You can continue to hold IncomePlus, or move without penalties into the company’s GIF Series 75 segregated (seg) funds with some money thrown in as a sweetener by Manulife. Yes, a major financial company is offering a bonus to get clients out of one of its products. Rob Carrick explains the move and why it’s happening now (for subscribers).

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Others (for subscribers)

The next financial crisis will threaten pension income

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: Bank executive sells over $16-million worth of stock

Monday’s analyst upgrades and downgrades

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

The Globe’s stars and dogs for last week

Canadian ETFs: August’s launches and terminations

Stock screen for U.S. wealth creators factors in volatility

Others (for everyone)

Oil market hears echoes of 2007/08

Tech index refresh could give under-the-radar names their day in the sun

Ask Globe Investor

Question: Are group scholarship plans a good option for Registered Retirement Income Plans?

Answer: I would not go near them. Group registered education savings plans, which pool your funds with those of contributors, are sold by commissioned sales representatives and charge hefty up-front fees. As a result, parents lose a chunk of their money right out of the gate. What’s more, the rules on contributions and withdrawals are complex and restrictive, and there are stiff penalties for leaving the plan early. In extreme cases, parents have lost all of their RESP savings. It’s no wonder group RESPs have sparked hundreds of consumer complaints and drawn scrutiny from regulators.

--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

Bond yields are approaching new multiyear highs, adding to concerns among equity investors already looking upon trade tariffs and high stock valuations with some trepidation. Should investors brace themselves for market turbulence? David Berman shares some insight.

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

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

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Compiled by Gillian Livingston

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