We regularly publish Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put… Read More
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.
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 for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective. This is the case for making investments from the TSX index.
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Background information on the TSX index
The TSX is the largest stock exchange in Canada and the third largest in North America. Of note is that the Toronto Stock Exchange has more oil and gas companies listed on it than any other stock exchange in the world. The Toronto Exchange started on October 25, 1861. The TMX Group operates a number of stock and commodity exchanges, including the TSX.
Like most other major stock exchanges, the TSX index is highly regulated. The Toronto Stock Exchange lists common shares of companies, but also index securities like ETFs.
Factors for finding the best stocks to invest on the TSX index
a) Financial factors:
Start your search by looking for companies that have a 5- to 10-year history of profits. Companies that make money regularly are safer than chronic or even occasional money losers. You’ll also want to look mostly for companies that have been paying dividends for at least 5 years—10 years is even better. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds. The last financial measure we like to see in a company is manageable debt. When bad times hit, debt-heavy companies often go broke first.
b) Safety factors:
At TSI Network we continue to look for companies that have industry prominence if not dominance. That's the same in 2017 as it was in 1997. Major companies can influence legislation, industry trends and other business factors to suit themselves. Smaller firms, on the other hand, don’t have that ability.
The next safety factor we look at is geographical diversification. We like strong companies that operate Canada-wide, but we think multinational corporations are better. There’s extra risk in firms confined to one small geographical area. The last safety factor we consider is that the best stocks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
c) Survival/growth factors:
We feel that the best stocks are the ones that are free from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. You can hold some of these stocks in your portfolio, but keep them to a reasonable part of a well-balanced portfolio.
We are also particularly keen on companies who have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will in turn try their new products.
Factors we look at when picking stocks from the TSX index
- We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
- We look for well-financed stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
- We like to see a strong balance sheet with low debt. For junior stocks, we like to see a major partner who can finance a mine, software and so on to production.
- We want to see experienced management with proven ability to develop and finance a new business.
- We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
- We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
- We compare the market cap of the stock with the estimated value of its reserves, future product sales and so on.
Our stock research is always focused on investment quality
Even if a stock looks like it might thrive, we may still refrain from recommending it for a number of reasons. Our stock research may lead us to conclude that it presents too much risk of heavy losses if it fails to thrive. Or we may feel that stocks we already recommend offer better alternatives. Or we may simply prefer to hold off on a promising stock because we feel it has limited near-term potential. This can happen because it has been overhyped in the broker/media limelight, for instance.
In many cases, we watch the progress of these stocks-we-like-a-little. We may recommend buying them months or even years later, but only after seeing favourable developments and signs of progress.
Do you currently own stocks from the TSX index? How have they performed for you? Share your thoughts with us in the comments.
This post was originally published in 2014 and is updated regularly.
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