Sunday, February 6, 2011

How I invest in the stock market on a daily basis

We're coming to a point where I have discussed many of my investment ideas. But especially after the last blog on valuing stock investments, you may ask yourself whether Godfried really understands all those companies he invests in. The honest answer is no, I don't. I am the CEO of my 'investment company' and set directions and make decisions often following advice of my 'contract staff' – stock brokers, financial planners, lawyers, accountants, realtors and property managers.

They bring the ideas and the data required to make a decision. I make the decision though and I am taking the blame for the downs and reap the rewards for the ups. If my 'contractors' don't perform I let them go, they literally expire (I don't fire). I own doorknobs in the shopping malls of RioCan . I own some tires in the Syncrude mines and a flare stack in CNRL's Horizon oil mine. I own counters in TD bank branches and some chairs in the offices of the Royal Bank. I also own a couple of miles of optical cables at Bell Canada.

Of course, I hardly know or understand any of those companies. I never met their CEOs nor their board members. They can lie or tell the truth about their companies of which I am supposedly a part owner, - I wouldn't know the difference. I hope these are mostly trustworthy individuals out not only for their own wellbeing but also for the well-being of their employees, shareholders, and the people in whose communities they work. I see them sometimes on BNN selling their companies to me. Diving into each of these companies to fully understand them would take me a lot more than a couple of evenings per month. My portfolio counts over 60 different investments in the stock and bond market. Then I own a significant amount of real estate. I sit on some of the condo boards and rental pool boards for properties I own. I enjoy doing it and I learn a lot about my investments. But fully understanding them? No, I don't.

I provide the direction for my portfolio; I look out for the landmines in the future. However, mostly I don't see them until I stepped on them. When I entered the elevator to my office on the morning of 9-11 in 2001, I first thought that the planes crashing into the towers of New York were a practical joke. It was unthinkable! Only later did I realize the severity of the event. So, no I am not especially gifted with knowledge or foresight; neither do I consider myself overly smart. I do think I can analyze data and news pretty well in order to come up with some general principals and trends. That is also my strength in my real day job as a geologist. Neither are my people skills exceptional, just ask my teenage son. He will be happy to enlighten you.

So how do you then invest Godfried? I listen, I learn, I read a lot. I like to make little unreadable spreadsheets to help me understand the consequences of my investment moves. I love figuring out how to analyse a property on a spreadsheet. In real estate, I do more the numbers than with stock market investments. Over the years, I walked into enough walls to know what I consider risky or just dumb. I used to buy IPOs (not anymore), I used to buy wind farms and Ballard Fuel Cells to learn that these investments are often pies in the sky. Let someone else lose their retirement on them. I do not like high-tech investment because 99 out of a hundred are obsolete before they are on the market; or 'management' does not have the perseverance to bring it to a successful end.

I learned to stick with large companies, preferably ones that pay dividends. They have often experienced senior managers that have been working in their field for years and years. Not that I trust them and even Manulife's management makes major mistakes. But overall, they perform well. So I buy shares in those large companies and follow the news a bit. Since I have over sixty investments, I do often just add to my existing investments. My full service broker comes from time to time up with new ideas, but lately we just add to existing stock investments. I follow a newsletter by Gordon Pape – highly recommended. He and his co-writers provide from time to time new ideas or confirm holdings I already own.

Internationally, I only invest through ETFs, except in the U.S. where I also buy the largest and best companies (at reasonable or low prices). Berkshire-Hathaway, Microsoft, Johnson & Johnson, Procter & Gamble. Sometimes a real deal comes along, like Telefonica during the European debt crisis with a temporary setback and a dividend yield of close to 10%. Microsoft trading at a P/E of 9. I jump on those. Sometimes I catch a 'falling knife', other times it is a big winner. At yet other times it is just dead money sitting for years in my portfolio.

Getting older, I realized that when I invest in stocks, I basically lend those companies my money. Instead of interest, I get dividends and parts of the profits. When I hold on long enough, I usually do better than plain investing in interest bearing instruments. I learned that I should NOT see a recession as something bad and bail out with a big loss. I hold on and possibly buy more stocks in good large, dividend paying companies at P/Es far below their normal levels. Then sit back and enjoy the ride (to some degree). I discovered that with some stocks you can supplement your dividend income substantially by getting good at selling their call options. You can sell these call-options, buy them back or let them expire dependent on the situation. Individual stock holdings are good for this.

Apart from investing in large cap stocks in North America, I have realized that many mutual fund portfolios and ETFs all hold the same stocks over and over in some form or other. I realized that my favourite ETF, iShares S&P/TSX60 (symbol XIU), holds all the stocks I already own or which I would like to own. It is hard to outperform those indexes. I do so only with special opportunities – the 'breaks' I have talked about in earlier posts. Buying into stocks or markets that everybody likes is usually expensive and profits are limited while risks are high.

I also invest in real estate. This is a long term game as well. I am doing OK and it protected me from the big 2008-2009 stock market crash. I have more control here, but a lot is in the hands of property managers. I seem to more 'manage' the managers than the properties and that with mixed success. But overall, it all works out.

So I listen to my full service broker and sometimes we buy a new investment. I worked with him now for the last 30 years and use him as devil's advocate. He gave me many good ideas. I also work with a discount broker for dealing with my call option deals (lower commissions) and buying my own stock ideas. These ideas are often selected using the Canadian Shareowner data base for a quick look or Gordon Pape's Internet Wealth Builder. I also check my company's stock charts on GlobeInvestorGold and Quarterly reports when they come out. I own many investments for 3 to 5 years. Some I have owned for a decade or longer. I sell when management starts to make multiple mistakes and there is no clear light at the end of the tunnel. Manulife I held for 10 years, ending up selling it for some meagre profits. Brookfield I have held for over 15 years and I am still adding shares. Vermillion I held onto for over 10 years and sold them recently at a sweet price of $45 (4 times the average purchase price) not counting distributions. Canadian Oil Sands I own since the 1980s and I bought more over the years. Distributions have exceeded the total purchase amount of investment. I lost my shirt on Laidlaw and Bombardier, trying to catch falling knifes. I won't touch Air Canada the perpetual money pit. I hold on to my winners until they become priced excessively or when they comprise too large a portion of my portfolio. I have bought and sold Boardwalk several times – every time I bought, it took off (not due to my brilliance, just luck) and after profits exceeded 40 to 50% in a matter of a few short months I took profits. The share price became 'too good to be true'.

If I had to start over, I would buy ETFs like those of the TSX60, the Dow Jones (Spiders) and some world index ETFs for Asia and Europe. Then sit back. If there is truly a cheap stock, I would add it to my portfolio, but it would have to be some special opportunity; something that happens like during the 1982, the 1987 or more recently the 2008-2009 crash. I would buy preferred shares as well during such times and trade call options 'for fun'. Overall investments should be 'boring' so you forget about them and do things more important in your life.

I have learned that it is best to buy large companies, reinvest the dividend in the same or in other large, high quality companies. Then just sit back and only sell when something goes seriously wrong with the company itself, but don't sell just because it is a recession. These strategies provide you the best bang for the buck. Be pragmatic, always be suspicious of the herd and follow Ken Fisher's advice: don't do the contrarian thing but expect something entirely different from the crowd's expectation. Mistakes are something to learn from. That is maybe expensive education but it is also unavoidable. Although avoiding mistakes may be cheaper, their lessons won't stick always well. Nothing is for nothing – unless you refuse to learn.

No comments:

Post a Comment