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‘Nick’ is the vague pseudonym used by a U.S. portfolio manager who avoids using his real name because it would require his firm’s approval for articles he writes online. The strategy is helpful in that it allows us to discuss two separate online essays by the author with significant insight for investors.

In ‘On The Great Jihad And Other Possible Futures’ on the Epsilon Theory site, Nick uses the science fiction novel Dune (which is topical in that Canadian film director Denis Villeneuve is currently editing a movie version of the book) as a metaphor to highlight the importance of probabilities and scenario analysis for investors.

The article highlights three broad outcomes for the global economy and markets in the coming decades – The Great Reset, The Zombification of Everything and The Great Jihad. He argues we are currently experiencing zombification which involves low interest rates, “policy controlled world of zombie companies, zombie investors and zombie civic institutions.” For investors, the zombie world rewards investors who are always buying assets and always long duration.

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The author has built a probability tree that looks at the market implications of each scenario – the possibility of a debt jubilee that would wipe out bond investors lies under The Great Reset scenario, for example – and I highly suggest investors take a look.

Nick published an addendum to the above piece on his own site, Demonitized. His self-critique of the original essay is worthwhile but the additional discussion of the dangers of market pessimism was even more valuable, “There is an important difference between spending a lot of time and energy thinking about risk and refusing to put capital at risk, or being chronically short equities."

He went on to explain that the core failing of permabears is that they become so entrenched in pessimism that the fact they don’t make money in the market is forgotten.

His final advice is that while it’s dumb to be a permabear, it is reasonable to base an investing approach on lower risk and reasonable returns rather than trying to shoot the lights out with market trouncing performance. Nick achieves his goals through a barbell portfolio construction that includes a more aggressive allocation along with a sizeable allocation to defensive, low volatility investments.

Personally, I can paralyze myself at times (like now) by listing and focusing too much on potential market risks. This is in large part a function of temperament but also academic research that conclusively shows that the more transactions an investor does, the lower their longer term returns become. With that in mind, the fewer times I get excited about an investment idea, the better.

Still, as Nick emphasizes, it is a thin line between caution and pessimism and I’ll try and re-double my efforts to remain on the right side of that border.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Pollard Banknote Ltd. Deteriorating profitability has put pressure on the share price, reports our equities analyst, Jennifer Dowty. However, analysts remain bullish, expecting the share price to rebound. There are four analysts with “buy” recommendations and the average 12-month target price suggests the stock may deliver a 29 per cent return over the next 12 months. That said, until profit margins improve, the share price is likely to remain depressed.

CGI Group Inc. This IT giant has been performing well. It reached an all-time high of $106.63 in September. It has since pulled back a little, but is still ahead by 320 per cent since Gordon Pape recommended the stock back in 2012. So why is he taking profits now? There are a few reasons.

Nutrien Ltd. The argument in favour of investing in crop-nutrient producers a decade ago was simple: Farmers needed to boost their efficiency as the world’s population expanded, and nutrients such as potash offered the best hope for a well-nourished planet. So long, simple. Today, investors are facing enormous complexities underpinned by the fact that there is no shortage of potash in the world amid wavering demand driven by geopolitical tensions and crummy weather. But should investors approach Nutrien Ltd. as a beaten-up buying opportunity? David Berman shares his thoughts.

Brookfield Infrastructure Partners LP John Heinzl explains why this company’s recent unit split is good for investors.

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The Rundown

Scouring the globe for dividends and cheap stocks? This will have you thinking twice

However you decide to diversify, you should remember that the case for diversification doesn’t rest on the notion that some markets are cheaper than others. Rather, it’s based on the observation that it is difficult to know which industry, or which region, will do best over the coming years. Ian McGugan looks at what you may not realize when buying market indexes.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: C-suite executives are buying these two dividend stocks

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Saudi stocks join emerging-market index, but get little love from fund managers

Others (for everyone)

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Ask Globe Investor

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Question: We have investments in TFSAs that pay a monthly income. At the end of the year you get the breakdown of the income, i.e. dividends, interest, return of capital (ROC), etc. As the funds are inside a TFSA, should ROC be of concern? As I understand it, ROC effects capital gains but wouldn’t these be non-taxable inside the TFSA?

Answer: You are correct. Any profit earned inside a TFSA is tax-free, with the exception of foreign dividends, which are subject to a withholding tax. It’s 15 per cent on U.S. source dividends.

--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

Horizons ETFs Management Canada is recalibrating its artificial intelligence exchange-traded fund (ETF) after a year of underperformance. We’ll go under the hood to see what’s going on.

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