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September 20, 2018

 
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How the human brain works against investors, the rising fortunes of a TSX gold explorer, and lessons learned from 2008
How the human brain works against investors, the rising fortunes of a TSX gold explorer, and lessons learned from 2008 - A roundup of investment ideas for active investors
 

Scott Barlow

Gartner L2 is a technology website which veered into politics so it was surprising to find one of the best sentences about investors in a Scott Galloway column: “My NYU colleague Jonathan Haidt, an inspiration, argues people are more like lawyers building a case for their gut feelings than judges reasoning toward truth. We form tribes and loyalties, and then build a narrative to support these intuitive decisions.”

Warren Buffett once described his investment style as ‘simple, but not easy’ and the phrase also applies to investors trying to follow the “don’t lie to yourself about your holdings” rule.

When we buy a stock we’re rooting for it obviously, and will make any number of excuses to keep it in the portfolio even if it’s failing. Otherwise, we’d have to admit we were dumb to buy it in the first place and no one likes admitting mistakes.

 
 
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It gets worse. I previously recommended a highly accessible neurobiology book (and New York Times best seller), Incognito by Daniel Eagleman, as an important text for investors to read.

Mr. Eagleman described the human brain’s automatic ability to lie to our conscious selves, the author writes “when one part of the brain makes a choice, other parts can quickly invent a story to explain why,” even when this narrative has little in common with the truth. In effect, we have a built-in, backward-looking screenwriter that makes our decision-making process look more sensible than it actually was.

My worst investment in the 2000s was a sizeable position in telecom equipment provider Juniper Networks. I bought it, it went down, and I held it at least five years too long because I refused to believe my original thesis – rising data traffic would create big demand for network hardware – was wrong. I had become a lawyer for a stock that was torpedoing my portfolio performance.

I continue to believe that managing emotions and being objective –“Thinking Slow” as Noble laureate Daniel Kahneman famously put it, is at least as important to investors as the ability to interpret balance sheets and stock valuations.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Aurora Cannabis Inc. (ACB-T). This stock just surfaced on the positive breakouts list as the share price rallied on high volume on Monday. The stock price soared on speculation that a future deal may be announced with Coca-Cola Co. Jennifer Dowty reports.

Transat A.T. Inc. (TRZ-T). The Contra Guys both like Transat A.T.'s stock. They both hold it in their personal accounts and believe the stock price has room to run. Although the bottom line has been spotty from year to year, with losses in four of the past 10, over all, the profits have far exceeded the red ink. The balance sheet remains uncharacteristically clean for an airline company with no debt. Normally, enterprises in this sector are heavily burdened with liabilities, leading many to join the pterodactyl in extinction. Over the past four years, the book value has jumped from less than $10 to about $15.50, while the share count has decreased slightly from 39 million to 37 million. Read the Contra Guy’s view.

Royal Nickel Corp. (RNC Minerals) (RNX-T). A ‘once-in-a-lifetime find’ has Eric Sprott thinking this is the start of something big for this small TSX gold explorer. He signalled he plans to stick with his holdings in RNC Minerals after the Toronto-based company announced the gold discovery that sent its stock skyrocketing. The company announced on Sept. 9 that it uncovered 9,250 ounces of high-grade gold worth US$15-million at its Beta Hunt mine in Western Australia. Brenda Bouw reports.

Nexus Real Estate Investment Trust (NXR.UN-X). This security is best suited for consideration by investors seeking income – a REIT that is yielding 8 per cent. The distribution appears sustainable with a payout ratio of 83 per cent. Once redevelopment at its recently acquired Richmond, B.C. property has been completed, it is anticipated to result in significant net asset value per unit growth. Oakville, Ont.-based Nexus owns a portfolio of 65 industrial, office, mixed-use, and retail properties located across the country. Jennifer Dowty reports.

The Rundown

Canopy no longer the world’s most valuable cannabis company

Tilray Inc.’s exploding share price allowed it to pass Canopy Growth Corp. Monday as the world’s most valuable cannabis company by market capitalization. Tilray gained 10.2 per cent Monday to close at US$120.19 on the Nasdaq stock exchange. The shares are up nearly 400 per cent since Aug. 14, the day before Canopy announced a US$4-billion investment from its partner Constellation Brands Inc. Canopy shares are up about 97 per cent since then. Over the past month, cannabis investors have been chasing the next big beverage-venture winner in the space. Monday, BNN Bloomberg reported that Coca-Cola is in talks with Aurora Cannabis Inc. to develop cannabidiol-infused drinks. The news sent Aurora up nearly 17 per cent. David Milstead examines these stocks.

Lessons for the next financial downturn, courtesy of 2008

During the grim days of September 2008, many saw the bankruptcy of Lehman Brothers Holdings Inc. as the end of Wall Street. In the weeks after its collapse, German finance minister Peer Steinbrueck declared that the long era of U.S. economic hegemony was over. For his part, French president Nicolas Sarkozy was sure Lehman’s failure marked the end of unrestrained American-style capitalism. Just about nobody at the time recognized Sept. 15, 2008, for what it turned out to be: A fine moment to buy U.S. stocks. Ian McGugan takes a look back at the lessons from the financial collapse of 2008.

These three stocks would appeal to the all-time great investors

If there’s one lesson to be learned from observing the habits of some of the most successful investors over the years, it’s discipline. This sounds a lot easier than it is in practice. Human nature is emotional, and its instinct is to flee danger. Despite good intentions, it’s easy for investors to chase hot stocks, react impulsively to market swings and make rash decisions that end up being costly mistakes. Along the way, long-term goals get kicked to the side and the most carefully constructed plan can get derailed. Investing for the long-term means resisting short-term reactions. John Reese explains, and takes a look at three stocks worth pondering.

ZEB vs. RBNK: Here’s the better ETF for investing in Canadian banks

There are many ways to gain exposure to Canadian bank stocks, but two exchange-traded funds offer particularly innovative ways that are worth a closer look. How do these ETFs stack up? The BMO S&P/TSX Equal Weight Banks ETF (ticker: ZEB) and the RBC Canadian Bank Yield Index ETF (ticker: RBNK) hold nothing but Big Six bank stocks, making them rarities in the ETF world where baskets of stocks tend to be large and diversified. David Berman takes a look at the differences between the two ETFs.

Why it’s time for investors to look America first

Predicting the course of the stock market at any time is an exercise in educated guesswork. No one really knows where we are headed until after the fact. There are so many variables that conditions can literally change on the basis of a tweet. That’s especially true right now, due to a wild card such as we have never experienced before – Donald Trump. That said, Mr. Trump can claim credit for several moves that extended the bull and boosted the U.S. economy. The most important of these are the tax reform bill passed last December and deregulation. In short, there is nothing on the immediate horizon to derail this U.S. bull. The odds of a recession in the next 12 months are very low. That suggests stocks will continue to move higher, at least in the short term. Gordon Pape explains his view.

How the wealthy spice up a humdrum portfolio

Investing in blue-chip companies can beef up a portfolio. But few would call that particular investment strategy exciting. What do high-net-worth investors sink money into when they want to shake things up? The answer, of course, depends on their investment goals, but often it reflects quirky personality traits as well. We asked six wealth advisers to tell us how their clients added some spice to their portfolios. Kira Vermond reports on what they said.

Top Links (for subscribers)

Canadians need to check their portfolios for zombies

Companies buying back shares will be top performers in next 12-18 months: strategists

Others (for subscribers)

Short sales on the TSX: What bearish investors are betting against

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: President sells over $4.5-million worth of this blue-chip stock

The Globe’s stars and dogs for last week

Monday’s analyst upgrades and downgrades

Ask Globe Investor

Question: I would like to know what United States TIPS funds (Treasury Inflation Protected Securities) I can buy in Canada. I am a Canadian citizen and am a resident in Canada. With U.S. interest rates rising, growing GDP, good corporate profits, low unemployment, and expected wage increases, more commentators are raising the possibility of increasing inflation. At present TIPS prices are low because most people still do not believe in the prospect of inflation. I do believe in the return of inflation and this could be a good time to buy TIPS funds while prices are still low.

Answer: I don’t know of any Canadian companies that invests exclusively in TIPS but there is nothing to prevent you from buying in New York. The largest fund of this type is the iShares TIPS Bond ETF (TIP), which has about US$24-billion in assets. It invests in a portfolio of inflation-protected U.S. Treasury bonds with an effective duration of 7.63 years. As of the end of August, the fund had generated a modest return of 0.15 per cent for 2018. The five-year average annual return to July 31 was 1.32 per cent, so don’t expect to get rich here. Distributions are paid monthly and can vary significantly.

There are a number of bond funds and ETFs sold here that use Canadian inflation-protected securities. As you might expect, returns were weak in the low-inflation environment of recent years, but they have improved recently. The one-year average annual compound rate of return for the category is a respectable 3.96 per cent (to July 31). The 20-year average, which covers the higher inflation period before the Great Recession, shows an average annual gain of 4.84 per cent.

--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

Don’t look now, but the benchmark U.S. bond yield is back above 3% and close to retesting its highs of the year. Bad news perhaps for dividend stocks, but not so much for REITs, which have been stellar performers so far this year. David Berman looks at the reasons REIT investors should stay upbeat as yields rise. Meanwhile, John Heinzl asks, Is Fortis the perfect dividend stock.

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

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Compiled by Gillian Livingston

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