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.

dual class shares

When it comes to dual-class shares, voting shares have certain advantages over non-voting shares

Aside from specific investments (such as U.S. and Canadian stocks, income trusts or exchange-traded funds), our Inner Circle members ask us a wide range investment questions. For example, I’ve been asked in the past about Canadian Tire Corp (Toronto symbol CTC.A and CTC), noting that the company has dual-class shares, or two share classes. The subscriber asked which share was better to buy.

At the time, I explained that Canadian Tire Corp has two classes of shares: the common shares (symbol CTC) carry one vote per share and the class A shares (symbol CTC.A) are non-voting. Investors can buy either class of share. At the time, I also told him which share was better to buy, and that we cover Canadian Tire in our Successful Investor newsletter. In addition, I felt like this question was a good opportunity to talk more about dual-class shares.

Most Canadian stocks with dual-class shares, including Canadian Tire, have a “coattail provision” in place. This provision aims to ensure that both share classes have equal rights in the event of a takeover. So, if you hold non-voting or subordinate-voting shares, you won’t miss out on a takeover bid. For example, Canadian Tire’s non-voting class A shares would carry one vote per share in the event of a takeover offer, just like the common shares.

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Dual-class shares of Canadian stocks: Voting shares do have certain advantages over non-voters

If a company’s two classes of shares trade for roughly the same price, you’re better off buying the voting shares. That’s because the voting shares may move substantially higher than the non-voting shares if a shareholder who is trying to take control of the company accumulates a large number of shares. In addition, voting shares sometimes trade above non-voting shares because certain institutions refuse to buy non-voters, or only buy them in limited quantities.

Canadian stocks sometimes combine their voting and non-voting dual-class shares into a single share class to make themselves more attractive to investors (particularly institutional investors) who dislike non-voters. When that happens, the voting shares may get a 10% to 20% premium over the non-voting shares in return for sharing control of the company. So, if you can buy the voting shares of a dual-share company for less than, say, a 5% to 10% premium over the non-voting shares, it can be a worthwhile investment.

Note that most Canadian stocks with dual-class shares have far fewer voting shares outstanding, and they trade far less actively than the non-voters. However, for long-term investing, having a vote is more valuable than a high level of liquidity, since the voting shares will tend to trade at or above the non-voters.

That’s why we recommend that you buy the voting shares when they trade at roughly the same price or less than the non-voters.

How investor fears about dual-class share Canadian stocks can lead to bargains

Some investors feel that dual or multiple share classes concentrate too much power in the hands of insiders and consequently expose outsiders to added risk. Some companies with multiple share classes do abuse outside investors. So do all too many companies with a single class of shares.

Over the years, we’ve had great success with a number of companies that have two or more share classes. Often, you can invest in these companies at a lower ratio of price to asset value or earnings power simply because some investors prefer not to invest in them.

We, of course, only recommend stocks if we see the insiders as people of high integrity. In that case, there is little extra risk in investing in a company with multiple share classes. On the other hand, if the insiders are inclined to cheat you, they will find a way to do so, regardless of the company’s share structure.

There are many opinions on the nature of investing. Some claim that it can be reduced to a science. Yet that ignores the fact that emotions play a large part in investing. Beginning investors can be gripped with fear and act in haste when the market is plunging, and their stocks with it. Or they may acquire the gambler’s mindset that a quick run of luck with one stock can easily be repeated. Even experienced investors can fall into these traps.

The best way to approach investing is to build your investment portfolio gradually, but systematically, with a firm goal in mind. Be patient, be informed about the investments you are considering and keep everything in perspective. Take a conservative approach to risk and an optimistic approach to high quality stocks. That way you won’t be pushed off course by turbulent markets. Keep in mind that stock prices generally reach successively higher levels over time.

If you have investment-related questions, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service.

What are your thoughts on dual-class shares? Leave a comment below.

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