November 15, 2000
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Investing Goals & Strategies
Marmit, this message is driven by your decision to quit buying stocks. I'll try to generate some intelligent and polite discussion about valid investing styles, offer some analysis (FWIW). I hope we will all benefit at the end. But to start with I want to say that even though sometimes I will be criticizing, I have no intention to abuse anybody or to question anybody's intelligence or experience. I am working on my own investing style and strategy and though this year (my first year) is successful, I've made some stupid decisions...
So... Parsad. Even if you ignore 1998 - March 2000 anomaly, an average S&P return will be greater than 10.5%. An average inflation rate was much lower (I don't have a precise number, but if I remember it correctly, an average inflation rate was between 3 and 4%. Correct me if I am wrong). Comparing these two numbers we can see that STATISTICALLY being invested in S&P gives you more than just preserving your investment. Statistically, as long as there is a free market, free competition and need for good quality products, preserving your investment AND getting a few extra growth points should be no problem (assuming that you are Foolish enough - no day trading, long-term approach and thorough DD). So statistically preserving an investment is a no-brainer if you just go long term with index unit or fund, and to do better than index, one should really come up with a better-working strategy (buying ATY because it's comfortably priced and presumably has limited downside potential and much better upside potential is not a better strategy. We'll get back to it later).
Now, PH & N Dividend Income Fund is a really good one. It returned 14.37% for the last 15 years, has no loads and it's MER is only 1.14%. You have to have $25'000 to start with and every subsequent investment should be at least $1'000 (RRSP or not), so it's not an option for me, but for the Marmit (government employee) this should be no problem (kidding). Seriously, there are not so many unrestricted, RRSP eligible no-load funds that provide better returns than S&P. As for PH & N Dividend Income: compared with S&P it's ... LOSING. [Chart]
So Marmit, why would you buy something that underperforms index? You can buy index units or (if it's your RRSP port) an RSP S&P index fund and be happy.
Now, I think that Marmit (and most other Fools) can do better than S&P index fund and here are my ideas about:
1) Why Marmit and plenty of other investors underperformed so far this year.
2) How to outperform (untested... speculative... needs some input from more intelligent and experienced investors than me.)
Palsan, Tecmo, TWA40, Skandy, Nsoley and others - please don't be shy to criticize or support... or add something new.
I guess almost everybody here agreed that it makes sense to stick with some rules in order to make decent return on the market. The number one rule is (in my opinion) buying a company for LTBH so to speak, investing in a company that will potentially provide a good return for years. It doesn't mean that one will have to stick with his choice forever, and some sector rotation and selling high-flying stock when the price is unjustifiably high can and will happen. But if the company is not a good Long-Term (5 years for me) holding, it should be ignored even if it looks like a bargain. Marmit (I am not criticizing here, just giving my opinion) does completely opposite thing: he buys companies (granted, he ignores penny stocks and companies with bad financials) hoping that their upside potential is greater than the downside risk (ATY is a good example. It's was losing it's market share to Nvidia, it's financials were deteriorating, it's net margins were terrible...). This is pure market timing and odds were against you.
The number two rule IMO is: stay away from cyclicals like resources and energy unless you are really, really intimate with this area. Casey is a good example of the person with enough expertise to make decent money with energy stocks, but I don't recall anybody else on this board who is that successful/knowledgeable with cyclicals. Marmit bought some stocks thinking: comparably low price, good dividend and presumably good potential => value. It's not always the case with cyclicals. The number three rule IMO is: it's good to combine great growth potential with good value, but since good quality growth & value stocks are hard to find, go with good quality growth stocks. Some time ago I've read some survey on Growth Mutual Funds vs. Value Mutual Funds performance. I can't find the link now, but I remember that even though some years value funds do better, most years (60% or so) growth funds outperform. I guess this is the reason that market optimists like Skandy (pure growth guy) has a good chance to outperform some value-oriented cautious investors (no, not Warren Buffett... some other guys).
So here is my RRSP portfolio stock selection strategy (aside from my employee plan):
1) Always buy high-quality stocks that have excellent chance to preserve their quality for at least five years. Period. No exemptions. Every stock that I buy has to make this list. Canadian banks, Loblaws, Fairfax, Bombardier, NT, JDU, Celestica, MDS, Tundra Semiconductors, and a few others (pharmaceuticals) qualify. ATY, Canadia Tire, TransCan Pipelines do not qualify.
2) Stay away from resource and energy cyclicals.
3) Have a few stocks or a combination of an Index MF (I prefer NASDAQ index fund or units) and a couple of stocks.
4) The stocks that I am selecting can be expensive (good quality costs) but I shouldn't buy them at ANY price. There should be a few good chances to buy almost any stock at a reasonable (for it's quality and growth) price - general market volatility, unexpected swings in investors' minds, FUD, stupid overreaction based on some political issues (elections... will people stop using internet if Gore wins?.. buying food at Loblaws if Bush wins?.. taking Viagra if Nader wins?..). So I just set an entry prices for myself and patiently wait for the opportunity to buy. Some time ago I posted a message about Tundra. TUN.TO was trading at ~56.50 and I arrived at my entry price of $41.50. Guess what? It was $41 yesterday. Same thing happened with Amgen and NOK (I bought NOK at $38.875 US).
5) Patience... It's hard to achieve excellence here. I tend to have a selling urges as some of my stocks increase 30%. To deal with it I came up with the following. When I buy a stock I expect it to return (for example) 15%/year. If it goes up 50% on pure market optimism, with no growth changes, no good news to justify this move, I may sell it and keep an eye on it. If it goes up a lot with some earning increase projections, some major excellent news, I'll keep it. If it goes down like INTC, or JDU, I'll keep it: short term market swings are impossible to deal with. No TA, public sentiments or analyst downgrading based on un-Foolish analysis should affect my decision. If I get really nervous, I'll post a message on this board or that stock board (NOK, JDSU, QCOM, NT, Amgen have great discussion boards with a lot of knowledgeable people sharing their views).
Thanks a lot, Davidsbo.
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