How To Invest

Pat McKeough has been making investing for beginners simple—and profitable—by helping investors make big gains for more than 25 years. His advice tobeginning investors is the same as it is for all investors: buy high-quality, mostly dividend paying stocks (or ETFs that hold these stocks) and evenly spread your investments over the five main economic sectors (Resources, Manufacturing, Finance, Utilities and Consumer). Pat also believes investors should avoid stocks in the broker/media limelight and focus on those with hidden or little-noticed assets.

In addition, Pat thinks then beginner investors should cultivate two important qualities: a healthy sense of skepticism and patience.

Investors should approach all investments with a healthy sense of skepticism. This can help keep you out of fraudulent stocks that masquerade as high-quality stocks. It will also keep you out of legally operated, but poorly managed, companies that promise more than they can possibly deliver.

If you are a new investor, you should also realize that losing patience can cause you to sell your best choices right before a big rise. All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)

If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

investment funds manager

Here are some investment thoughts on snap judgments, the investors who make them and how they can hurt your portfolio.

Snap judgments can be a great time-saver, but they’re a poor tool for investment decision-making. Investment thoughts involving snap judgments often produce extreme, random results—good or bad. If you happen to make money with a series of snap judgments, it can turn into a habit. This may lead you to invest ever-larger sums of money this way, and that’s when your risk really rises.

After all, your random results will turn eventually from good to bad. That’s liable to happen just when random bad results can do the most damage to your finances.


NEW! The real secrets of successful investing

Successful investors have good habits. Investors who let their emotions rule can face tremendous losses. Pat McKeough’s new report “How to invest in stocks” shows you how to stay in control so that you can make the right decisions even in the worst markets.

 

Read this FREE report >>

 



The biggest problem with snap judgments: They’re based on short-sighted investment thoughts

The problem with snap judgments is that they deprive you of perspective. It’s better to base buy and sell decisions on a broad sample of the vast information that’s available on any investment. With snap judgments, you zero in on a tiny and unrepresentative sample such as an individual news item.

This news item may be an earnings report that beats the consensus forecast (the average earnings estimate from brokerage analysts). You may see this so-called “positive earnings surprise” as a sign that points to a lasting rise in earnings and the stock price—one that can go on for weeks, months, even years.

Of course, the stock’s rise may instead last for hours, minutes, or seconds—if it happens at all.

The funny thing is that earnings estimates are based on info supplied by the company. Some companies routinely try to manage brokerage-analyst expectations “downward.” That way analysts routinely underestimate their earnings. This can lead to a string of “positive earnings surprises”—earnings reports that beat the consensus.

This may give some investors the idea that the company is forging ahead much faster than expected.

In that case, the market may reward the company with a higher per-share price-to-earnings (P/E) ratio. It may trade for 22.0 times earnings instead of, say, 19.0 times. This can cut the company’s cost of financing. It can also make it cheaper to provide stock options to executives. But the fun can end abruptly.

For instance, suppose the company runs into unforeseeable earnings problems. This may lead to a “negative earnings surprise.” Earnings may come in far below the consensus, perhaps lower than recent quarters, and may even show a loss. This can spur selling by a lot of “snap-decision investors.”

Investment thoughts: Keep in mind that one-time gains can artificially inflate a company’s earnings and lower its P/E

Make sure you factor out low P/E’s that arise if a company records a large one-time gain, such as when it sells assets. One-time gains temporarily balloon earnings and shrink the P/E ratio, and are not representative of the company’s true ongoing earnings. Similarly, you should add back any one-time write-offs, so you don’t miss any stocks that have low P/E on an ongoing basis.

Final investment thoughts: snap judgments and the investors who make them

We’re focusing here on earnings reports as an example of a snap judgment because they can spur conservative investors to buy or sell. More aggressive investors may buy on much flimsier news items such as the launch of a new product line, the possibility of a big contract from a major (even unnamed) company, rumours of a takeover bid—anything can do it.

You can get lucky with snap judgments, just as you can with lotteries. But if you let snap-judgment investing become a habit, it will eventually cost you money. The flimsier the basis for your judgments, the more you’re likely to lose.

Better investment thoughts: Maintain a healthy sense of skepticism

If an investment sounds too good to be true, it probably isn’t true. Recognize, too, that some of your most promising investments will disappoint you, since no one can predict the future.

Remember, the investment business deals in intangibles and relies on trust, so it attracts more than its share of crackpots, dreamers and crooks. They have an uncanny ability to home in on trusting investors who accept dubious claims at face value. But if you follow a stock market investing strategy of diversifying and focusing your investments on well-established companies, your gains will offset your losses.

Have you made snap judgments in investing? What was the result?

While snap judgments may not be a good strategy in the long term, is there a snap judgment you’re sorry you didn’t follow through on?

Read More

How To Invest Post Archives

Investment thoughts 101: Why snap judgments could ruin your portfolio

Investment thoughts 101: Why snap judgments could ruin your portfolio

Here are some investment thoughts on snap judgments, the investors who make them and how they can hurt your portfolio.

Snap judgments can be a great time-saver, but they’re a poor tool for investment decision-making. Investment thoughts involving snap judgments often produce extreme, random results—good or… Read More

Renaissance Global Health Care Fund (Formerly Talvest Global Health Care Fund)

RENAISSANCE GLOBAL HEALTH CARE FUND $44.77 (CWA Rating: Speculative) (Renaissance Investments, 1500 Robert Bourassa Blvd., Suite 800, Montreal, PQ. H3A 3S6. 1-800-268-8258; Web site: www.renaisanceinvestments.ca. Available from brokers) invests primarily in U.S. companies and global companies with U.S. operations or exposure to U.S. markets or… Read More

Tax shelters in Canada: 3 choices you need to know about

Tax shelters in Canada: 3 choices you need to know about

Tax shelters in Canada that can help you save money when you use them correctly
Tax shelters in Canada aim to reduce or eliminate your tax liability.
Tax shelters are legal investment vehicles that let investors pay less tax. Some are risky and should be avoided, like… Read More

What are stock investment clubs?

What are stock investment clubs?

Stock investment clubs can help new investors find quality stocks and help them develop their own investing style. But watch out for the drawbacks.
In 2017, learning about stocks is as easy as connecting to the Internet. But if you want to further your knowledge of investing,… Read More

What is market timing theory?

What is market timing theory?

Market timing theory attempts to interpret and detect buy and sell signals in trading patterns and history.

Political tensions in Washington following the 2016 U.S. elections have reignited interest in marketing timing theory. The practice of market timing consists of coming up with and acting on a.. Read More

The real costs of using practice accounts to buy stocks online

The real costs of using practice accounts to buy stocks online

Whether you’re a beginner or an experienced investor, these tips give you fundamental advice and show you how to put it to work right away–without any need for practice.

Today’s tip: “Practice accounts that let you buy stocks online without real money may seem to be a convenient way to learn investing… Read More

Canadian capital gains tax is one of the lowest you’ll ever pay

Canadian capital gains tax is one of the lowest you’ll ever pay

Stock market volatility in 2016 spurred a rise in investor questions about capital gains tax. Given its own volatility, 2017’s bull run has spurred even more questions.
There are three forms of investment income in Canada: interest, dividends and capital gains. Each is taxed differently. Here’s a reminder of how… Read More

Tips for picking stocks from the TSX index

Tips for picking stocks from the TSX index

Financial, safety, and survival factors are important to consider while looking for stocks on the TSX index
The TSX is the abbreviated name for the Toronto Stock Exchange. You will often see our stock recommendations on TSI Network accompanied by a TSX symbol. When we’re looking… Read More

Capital gains in Canada: How to do smart tax-loss selling

Capital gains in Canada: How to do smart tax-loss selling

Use tax-loss selling to offset your taxable capital gains in Canada.
Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada.  You can then use these losses to offset your taxable capital gains.

In… Read More

How to profitably pick stocks from TSX listings

How to profitably pick stocks from TSX listings

Our investing recommendations are the same for TSX listings as they are on other stock exchanges—here’s how to choose wisely
To succeed as an investor, you need to be able to “cut through the noise”. That is, you need to sort through the news to… Read More

The hidden dangers of online trading

The hidden dangers of online trading

It doesn’t get as much play in the media as it did a decade ago, but even in 2017, online trading looks like a fairly quick and convenient way to build wealth. Still, there are many hidden dangers that aren’t always evident at first.

The main risk comes… Read More

How do stocks work in the market and in your portfolio?

How do stocks work in the market and in your portfolio?

How do stocks work? It’s time to learn how stocks work so you boost your portfolio returns
Have you ever wondered, “How do stocks work?”
Stocks are financial instruments that let you hold an ownership stake in a publicly traded company. A stock you own gives you… Read More