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40 Lessons Learned After Almost 40 Years

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If you count actual jobs, I have now spent more than 36 years in the investment industry. If you start from my first stock trade, I have spent 47 years watching, analyzing and trading stocks. Even after so long, there is still lots to learn. That’s why I love the market—every day is different; every day creates an opportunity to either make—or lose—money. My goal—and yours—is to be on the right side of that equation. 

While you will never know everything there is to know about the market, and in fact, when investors think they know everything, they are clearly destined for trouble, experience does help. Over the past 47 years, I have picked up a few pointers and guidelines. They don’t always work, but they tend to work more often than not. 

I am going to share with you some of my favourite investment/trading guidelines. Remember, these are just for you. It is simply our way of trying to help you, the individual investor, get better long-term investment performance. 

Investor Rules To Live By: 

1. Never sell a stock JUST because it is up. You will never get a triple if you sell a double. You will never own a stock that goes up 3,000% if you sell after it rises 100%. The key here is to ask yourself: “Why is this stock up?” and “Why are others buying it, if I am thinking of selling it?”. The answer is usually, the stock is up because the company is doing fabulously well. Others want in. With strong demand confirming it is a good stock, maybe selling is not the best move. 

2. New highs are a great way to find new stocks. I go through the new high list every single day. When a stock hits a new high, I ask myself: “Why are investors paying more for this company than they ever have? What’s going on here?” Generally, what’s going on is that you have found a fabulous new company to investigate further. 

3. A diamond in the garbage is still a diamond. Sometimes, you will have a great company that no one else seems to like. That doesn’t mean it is not great. If you found a 15 carat diamond in the trash, would you throw it out? Of course not: it is still a diamond. Sometimes, you need patience with your stocks. 

4. The TSX Composite Index should not be followed. The TSX is a market cap-weighted index, which means bigger companies get more representation in the index. Remember Nortel? At one time, it was 56% of the TSX Index. Right now, the TSX is made up mostly of financials and resources. You can’t “spend” an index so why do you even look at one? Make sure your own portfolio is properly diversified. The TSX Index is not. 

5. Doing nothing in a crisis is usually the best plan. When the market corrects, or even crashes, there will be no shortage of doomsayers and brokers who will advise you to sell. They want you to panic, so that their “expertise” will be more valuable to you. But smart investors know they do not NEED to do anything. Doing nothing is almost always the best response. Buying into a downturn usually works, but you cannot time the actual market bottom, so doing nothing is even less risky.

6. “Initial” dividends are awesome. When a company declares its first-ever dividend, pay attention. A very first dividend is a huge sign from a company that business is going well. 

7. Avoid companies below a $25 million market cap. These are often just lottery tickets. Even if it is a “good” company, very high public listing fees simply eat away at a company’s capital, every single year. Let someone else take all the microcap risk. You can buy later, when the company has proven itself and risks are dramatically lower. 

8. Greed will kill your portfolio. Do not use excessive leverage, speculate, or take a flyer. This is not investing; it is gambling. 

9. High fees will destroy your portfolio performance. We think all mutual funds with fees of more than 2% should be banned from existence. 

10. Corporations think differently than investors. The worst investors are the ones who focus too much on quarterly results. The best companies are the ones that ignore them. 

11. Sector selection is more important than stock selection. Your sector allocation decision should be key. When a sector “moves”, even the “bad” companies show great returns. If your portfolio is invested in the wrong sectors you are going to have a tough time getting good investment returns. Having some exposure to all sectors is often better than trying to time a single sector. 

12. Water the flowers. You should be willing to buy MORE of a company after it has done well. Keep concentration limits and portfolio weights in mind, but a company doing well deserves more of your money. 

13. You are going to have loser companies. SELL THEM. If you don’t have losing investments you are not trying hard enough to find winners. 

14. Math works for you. You can have a stock go up 10,000%, but you can only lose 100% on a stock. You just need a few giant winners to make up for dozens of losers. 

15. “Hope” is not an investment strategy. 

16. Selling “when I break even” is a horrible investment plan. 

17. Doubling down rarely works. Just because you were wrong at $25 per share does not make you more right at $10 per share. 

18. There’s this sweet section of companies that go from $50 million to $100 million in market cap value. At $100 million, people care. At $50 million, they don’t care, but it’s exactly the same company. 

19. You must believe in your stock selections. If you have no confidence, why do you own them? 

20. Insider ownership is very important. You want executives of the company you buy committed to the company, and not with options, with shares. If they are going to lose you money you want them to hurt personally. 

21. Assume any stock could drop by 50% tomorrow. What would your reaction be? Make sure your portfolio matches your risk profile. 

22. Good companies tend to continue to do well. The market will always gyrate, but quality will outperform, longer-term. 

23. When one of your stocks declines ask: “Are people selling because of earnings?” Are they selling because they’re worried about the market? Or are they selling because it’s down?” Often, selling begets more selling. This can create some good opportunities. 

24. If you have set up your portfolio properly, you should see the need to make very few changes over time. 

25. Companies that grow their dividends are vastly superior to companies with high-dividend yields. Don’t get sucked into the 8% yield. Buy the 1% yield that’s going to go to 2%, 3%, 4%, 5%, etc.

26. If you consistently invest then it really doesn’t matter if the market goes up or down. At the end of 10 years you’ll have a good average price. 

27. There is always a crisis somewhere. Investors like to worry, and there is always something to worry about. This prevents them from seeing the good things out there. In 44 years, we have seen everything from war to pestilence. Guess what? The market is still here and has done exceptionally well in that time. 

28. Fear always results in greater volatility than greed. Sure, most investors know that the market runs on greed and falls on fear. But when investors get scared they are far more reactive than when they get greedy. When a company misses earnings estimates it almost always falls more than companies that beat earnings estimates. As they say, the market “takes the stairs up, and the elevator down”. When there is bad news at one of the companies you own, take a deep breath. The stock may be down a lot, but is the news really that bad? Investors, as a herd, tend to shoot first and ask questions later. Be careful not to get shaken out of a good stock just because of a bad headline. 

29. Hostile takeovers almost never succeed at the first bid. In the majority of cases a higher bid emerges, either from the first buyer or a third party. 

30. Investors still focus too much on the short term. 

31. Momentum is an investor’s best friend. 

32. Buy companies that are doing better than their peers. 

33. You are looking for leadership, not also-rans. Always be willing to pay for quality. It is better to pay a premium for a great company than to get a so-so company at a discount. 

34. Avoid companies with a lot of debt. Debt can kill a company, especially in a recession. It is very hard for a company to go bankrupt if it has no debt (it is not impossible, just harder!). 

35. Do not be afraid to invest. We recently heard an investor say they were not going to invest until the ‘market was on a firmer footing’. We don’t even know what this means. Will they invest when the market has gone up more? Or when it crashes? As surely a crash would not be ‘firmer’ footing. There will ALWAYS be something for an investor to worry about. If you look for reasons not to invest you will find them and never invest in anything. The best time to invest is yesterday. The second best time is today. 

36. Don’t get emotionally attached to a stock. Bad decisions are made when this happens. What stocks you own and how they perform does not and should not define you. 

37. You can’t time the markets. Accepting this can alleviate a lot of stress and worry about “if this is the top”. Downturns, recessions and depressions will occur many times in the future and should be expected, so act accordingly. Keep your portfolio allocated in a way that meets your needs and risk profile and stay diversified. When markets go down, stick to your plan and rebalance accordingly. 

38. Don’t define yourself as a type of investor (value or growth). as this limits your investable universe and can make you pass on great investments you would have owned otherwise. You can lean more toward one style or another but totally ignoring the other side can have opportunity costs. 

39. “Perfection is the enemy of progress”. So many times, we see investors diving into nitty gritty accounting metrics or minute details before they want to own a stock. By the time they have developed the perfect analysis, they have missed out on a large deal of returns or the whole opportunity. You will never know everything about a company or a stock. Embrace this and know the difference between knowing enough to make an informed decision while understanding the risks and the declining marginal benefit of knowing more. 

40. Valuation is not the be all and end all. Yes, it needs to be considered but I cannot count the number of times some of the best stocks in North America were called too expensive only to double or triple from those levels. Focus on finding great, growing companies with great fundamentals first. With these companies, whether a stock is at 15 or 20 times earnings will not matter five years from now. 

Peter Hodson CFA,
Founder of 5i Research.ca 



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