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Jun 29, 2018

The Learning Curve In The New Era - Part #3

by Don MacKenzie

Don MacKenzieI am going to assume that you noticed most of the best points in my first two articles were things you already knew to be true. What is left for me to do then is draw attention to how my approach is most different from common practice. What has worked for me in the past [14.5% 2002-2017] might continue to work for me and might be of help to you. Forget for a moment that overconfidence is one of the most common errors made by investors. I am an optimist and happy to be where I am. It is my fondest hope that my investment approach has something to do with my good returns. I am going to continue this approach, modifying it when experience, new facts, or reason show that to be necessary.

If you showed my portfolio to a professional advisor you would get many sceptical and negative comments:

  • Having an equities-only portfolio is too risky.
  • Having 90% invested in Canadian stocks is regional bias run amuck.
  • Ignoring whole sectors of the economy increases volatility and risks missing an opportunity.
  • Having five holdings making up 55% of a portfolio is too risky.
  • This portfolio is too small to allow for diversification.

Diversity has a good name. Rarely is a bad word spoken about it. Diversification is why most investors prefer balanced funds. I have heard it called the only free lunch in investing, the only 'no cost' way of protecting yourself from downside risk. Diversification protects you from downside risk in hard times by moving your returns toward the middle. In better years it also moves your profits toward the middle.

The long-term trend in equities is up. I don't want to protect myself from that. As a stock picker, I prefer to search out individual stocks which demonstrate an ability to beat the index. They will help in down times and build a better cushion of profits in good times. Because such stocks are difficult to identify, a portfolio of them is going to contain fewer stocks than most. All the better, say I. My life is going to be easier because I will have fewer stocks to keep track of and should be able to make better decisions about which ones to keep and which ones to let go. The short answer is that I prefer the protection of good performance over the protection of diversity.

Having almost exclusively Canadian stocks is another way to keep things simple. I don't have to deal with exchange rates, conversion fees, or foreign tax complications. I held US stocks as part of my portfolio for over 10 years. My gain was less than 1% per year. The exercise was a distraction from what I am good at, picking successful Canadian stocks. There is no reason for me to pursue an area where under-performance is so clear.

I much prefer a low turnover rate in my portfolio, but I have done an embarrassing amount of trading in the last twelve months. The most significant sells were: Norbord (realizing a long-term profit as it rose to fair value), Home Capital (a long-term holding which had clearly deteriorated), and Shopify (which was my in-and-out mistake for the year). The proceeds were immediately re-invested, mostly in stocks I already owned. Additional portfolio purchases were funded from a cash infusion (equivalent to 25% of the existing portfolio) from the sale of a rental property. The net result was a slightly more diversified and conservative portfolio and an increase in holdings from 15 to 16. My portfolio of a year ago was 99.73% invested in Canadian equities. Today the portfolio remains all in equities but now has a 10% international component. Where I previously had one mutual fund (6% of the portfolio), today I have three mutual funds (12% of the portfolio). It seems that I am entering a new era in my investing life. A review of my past situations shows that a similar claim could have been made in 2002, 2007, 2009, 2012, 2015, 2016, and now in 2017. A new era is likely underway right now. It is best to pay attention and to make careful use of your portfolio guidance.

A Snapshot Of My Current Portfolio Guidance:

  • Always be fully invested.
  • Invest all in equities.
  • Pick Canadian stocks with a long history of out-performance and significant exposure to other markets.
  • Favour stocks having dual class shares.1
  • Aim for a low turnover.
  • Favour stocks held by successful mutual funds also having a low turnover (see Mawer).
  • Avoid commodities.
  • Keep an investing diary.
  • Use a portfolio tracker.
  • Track several model portfolios.
  • Use no-load mutual funds to provide diversification outside of Canada2.
  • Read the news.
  • Ignore the news.
  • Be open to modifying your process, but be reluctant to do so.

I hope that helps.

A Final Tidbit:

Financial Advisors: Financial advisors market themselves as investment specialists. They offer “beat-the-market” strategies to manage your portfolio. This is so difficult to do that they direct most of their energies toward the easier job of managing investors.

Good advisors are like psychiatrists.

  1. They dig out the essence of the person and situation.
  2. They help the client define goals and identify obstacles.
  3. Advisors then work with clients to overcome those obstacles and achieve their goals.

This is a lock-step process requiring precision and documentation. The sequence cannot be changed; the order of importance is fixed, and no step can be omitted. Any review necessarily begins again with a) and moves through c).

Don Mackenzie, Retired teacher (1998), Landlord (1993-2017). Set up investment portfolio in 2002; lifetime gains 14.5%/yr. to Dec. 2017. Resides in St. Catharines, Ontario. Email: succinctscribe@gmail.com

 

1 Why Family Businesses Outperform

https://beta.theglobeandmail.com/report-on-business/rob-magazine/why-family-businesses outperformtheir-publicly-tradedrivals/article36727765/

2 “The Lowdown On No-Load Mutual Funds”

https://www.investopedia.com/articles/mutualfund/07/no-load.asp