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What Makes a Great Investor

Peter HodsonMy partners and I have now owned Canadian MoneySaver magazine for five years. It has been a most interesting experience. It’s tough running a magazine these days, what with high print and postage costs, and the world shifting to a ‘give me the news, now’ mentality. But the difficulties are always balanced off with satisfaction—we love helping investors improve their financial situation. It still makes us happy and offsets some of the guilt remaining from our days as a portfolio manager charging high management fees in good times and bad.

The best news we get, ironically, is sometimes when a subscriber cancels their subscription. Let me explain: We get cancellations, of course, for various reasons, just like any other magazine would. We always ask the customer for a reason, just so we know and perhaps can make improvements. Every so often, though, the answer comes back as ‘I just don’t need any more financial advice—I’ve got enough money’. We, of course, love this answer, even if it means losing a customer. Over the years, we have found some common traits amongst these very successful investors. Here are a few:

Successful Investors Do Not Average Down On Losing Positions:

Recently, Bronte Capital put out a great investing piece on the perils of averaging down. While, like anything, averaging down can sometimes work, generally, it is a plan that usually fails. As the blog piece puts it: “After all, if you loved something at $40 and you were wrong, you might love it more at $25 and you are almost as likely to be wrong, and like it more still at $12 and could still equally be wrong.” (http://brontecapital.blogspot.ca/2017/01/when-do-you-average-down.html)

Throwing new money at losing positions has killed many an investment career in the fund management world. Don’t let it kill your own portfolio. Nortel was a great example. Many investors said, ‘there is no way it can go lower’ and kept right on buying.

Successful Investors Love And Use Dividend Re-Investment Plans (Drip)S:

Dividend Re-Investment Plans, or DRIPs, are one of the wonders of the investment world. This is when you buy shares in a company and register the shares with the company’s DRIP program. Then, instead of getting cash dividends you get more shares. Sometimes, these shares come at a 2%, 3% or 4% discount to market price. Regardless, there is no commission. So, over a period of years, your money continually compounds into the stock you own. With the discount, it is the closest thing to ‘free money’ you can get in the stock market. The rich investors we know use DRIPs as much as they can. They understand the power of commission and management fee-free compounding. Check our DRIP page in this issue for some high-quality companies to start with.

Successful Investors Continue Investing On A Regular Basis:

This is reflected in the DRIP strategy above, but the successful investors we know see investing as a life-long plan. Many investors, of course, will put away 10% of their paycheque, every month, and invest in good times and bad. This ensures that they buy more investments when things are ‘down’ and less when things are ‘up’. Regular investors find they really don’t care much about market volatility. They know that what happens in the market today really has little impact on their possibility of investment success over the next 15 or 20 years.

Successful Investors Do Not Bet On Any One Sector:

Everyone has seen those hedge funds that post ‘great’ returns one year or the next. Last year, for example, a Toronto hedge fund (we will leave the name out) rose more than 124% and attracted a lot of attention. But a close examination showed that the hedge fund fell, sometimes sharply, in each of the prior five years. The performance shows the manager is simply taking ‘bets’. In some years, the 

manager’s bet will pay off handsomely, in others, well, not so much. Rich investors know, though, that if you are going to go down 50% one year and then up 80% the next, you are eventually going to run out of money. Smart investors diversify their portfolios and do not ‘bet’ on, say, junior golds or marijuana stocks. They may not make headlines with giant one-year returns, but their 20-year track record is far more impressive.

Successful Investors Ignore Short-Term Fluctuations In The Market:

Every day, we get questions from clients along the lines of ‘why is my stock down 2% today?’ Often, we do not know the answer. Sometimes, stocks will go down. It does not necessarily mean anything at all. Stocks will often act independently of any company fundamentals, sometimes for long periods of time. The richest investors know that stocks don’t go straight up. They know that, over the long-term, the fundamentals will win out. They don’t let a 2%, 3% or even 10% drop scare them out of selling a great company too early.

Successful Investors Keep An Eye On Taxes:

We have said before that you should never let taxes drive an investment decision. However, this does not mean you should ignore their impact. Harvesting a capital loss against a capital gain can save you up to 23% in taxes paid, for example. No investment can provide that sort of guaranteed gain, so it is important to take losses when appropriate. In addition, successful investors know that if they sell a winning stock in an unregistered portfolio, they need to pay taxes and find a replacement security. Sometimes, then, it is simply better to let your winning positions run: Save taxes, save commissions, save stress. Along the same lines, all the successful investors we know have maximized their TFSA and RRSP accounts, to avoid or defer taxes as long as possible.

Successful Investors Keep Fees Low:

Hopefully, as MoneySavers, we don’t have to tell you this. Shifting your investments from high-cost mutual funds to ETFs, or from ETFs to individual stocks, will save you a bundle on fees and improve your long-term portfolio performance dramatically. As you know, the majority of mutual funds cannot beat the market, so one needs to reconsider why you might be paying 2.5% for below-average performance. For Canadian investors, perhaps investigate iShares Core S&P/TSX Capped Composite Index ETF (symbol XIC), with fees of just 0.10% and a one year return of 24.7%.

There are many other characteristics of great investors, of course, and we hope to list more in a future article. In the meantime, ask yourself how many of these investment traits you are following. Maybe you can improve your portfolio’s long-term prospects by following what ‘great’ investors do.

Peter Hodson, CFA, Head of research at 5i Research Inc, an independent stock research company, research@5iresearch.ca, www.5iresearch.ca