How To Invest
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.
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One part of our three-pronged investing program is to spread your money out across the five main stock sectors of the economy (Manufacturing & Industry; Resources; Consumer; Finance; Utilities). (The other two parts are to hold mostly high-quality, dividend paying stocks, and downplay stocks in the broker/public-relations limelight.)
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How we place stocks in the appropriate stock sectors
Many stocks clearly fit in certain stock sectors. Royal Bank, for example, obviously goes in the Finance sector. But sometimes correctly categorizing a stock requires a judgment call. That’s the case with La-Z-Boy Inc. (symbol LZB on New York). We update our buy/sell/hold advice on La-Z-Boy in the current issue of Wall Street Stock Forecaster, our newsletter that focuses on U.S. stocks. See below for further details on this rapidly changing company....
On January 15, Stock Picker’s Digest, our newsletter for aggressive investing, will unveil a stock that’s well positioned for explosive profits in 2010 — and if you hold it for a couple of years, there’s a great chance that it could skyrocket even further. In fact, we think this company’s prospects are so bright we’ve named it Stock Picker’s Digest’s #1 stock pick for the coming year. This Canadian firm has staked out a strong position in its industry. Plus, its low cost structure puts it in a strong position to profit as the economy recovers. And these advantages are only the beginning. The company has recently made a big investment in improving its computer systems. And it has a great reputation for customer service — an often underappreciated factor in attracting and retaining clients....
ALTAMIRA SCIENCE & TECHNOLOGY FUND $7.59 (CWA Rating: Aggressive) (Altamira Investment Services, The Exchange Tower, 130 King Street West, Suite 900, Toronto, Ont. M5X 1K9. 1-800-263-2824; Web site: www.altamira.com. No load — deal directly with the company) mostly invests in U.S. companies in the telecommunications, biotechnology, environmental-technology, health-care and computer industries. Altamira Science & Technology’s top holdings include Apple, Microsoft Corp., Google, Hewlett-Packard Co., Oracle Corporation, Electronic Arts, Pfizer, Intel, EMC Corp., Cisco Systems, IBM, Qualcomm, Canon and Merck & Co. The fund’s MER is 2.35%. The $44-million fund gained 21.7% (in Canadian dollars) in the year ended November 30, 2009. The Nasdaq index rose 19.4% (also in Canadian funds) in the same period. Over the last 10 years, the fund has lost 11.3% annually, compared to a loss of 7.4% annually for the Nasdaq index....
ISHARES MSCI EMERGING MARKETS EASTERN EUROPE INDEX FUND $29.16 (New York Exchange symbol ESR; buy or sell through brokers), is an ETF that aims to track the MSCI Emerging Markets Eastern Europe Index. The fund’s geographic breakdown is as follows: Russia, 74.6%; Poland, 12.9%; Czech Republic 6.4% and Hungary, 6.1%. iShares MSCI Emerging Markets Eastern Europe Index Fund’s top holdings are Gazprom (Russia: gas utility), 22.4%; Lukoil (Russia: oil and gas), 10.9%; Sberbank (Russia: bank), 7.5%; MMC Norilsk Nickel (Russia: mining), 4.7%; Rosneft Oil (Russia: oil and gas), 4.3%; Mobile TeleSystems (Russia: wireless), 3.9%; CEZ AS (Poland: utility), 3.5%; OTP Bank (Hungary: bank), 3.0%; PKO Bank Polski SA (Poland: bank), 2.9%; and Surgutneftagaz (Russia: oil and gas), 3.7%. The fund’s industry breakdown is as follows: Energy, 49.2%; Banks, 20.4%; Materials, 11.9%; Telecommunication Services, 10.8%; Utilities, 3.5%; Pharmaceuticals, Biotechnology and Life Sciences, 1.9%; Software and Services, 0.5%; Media, 0.5%; Food, Beverages and Tobacco, 0.5%; and Real Estate, 0.5%.The ETF has an expense ratio of 0.72%....
ISHARES MSCI BRAZIL INDEX FUND $77.79 (New York Exchange symbol EWZ; buy or sell through brokers), is an ETF that is designed to track the Brazilian stock market. The fund’s top holdings are Petrobras preferred shares (energy), 12.5%; Petrobras common shares, 10.2%; Cia Vale do Rio Doce (mining) preferred shares, 9.4%; Cia Vale do Rio Doce common shares, 7.0%; Itau Unibanco Multiplo SA (banking), 7.8%; Banco Bradesco preferred shares (banking), 4.7%; Cia de Bebidas das Americas preferred shares (beer and other beverages), 3.2%; Cia Siderurgica Nacional SA (steel), 3.0%; Gerdau SA (steel), 2.4%; and OGX Petroleo e Gas Patricipa (energy), 2.4%. The fund’s industry breakdown is as follows: Materials, 28.5%; Energy, 25.9%; Financials, 19.5%; Consumer Staples, 7.9%; Utilities, 7.0%; Telecommunication Services, 4.0%; Consumer Discretionary, 2.4%; Information Technology, 2.1%; and Industrials, 2.0%. The ETF has an expense ratio of 0.63%....
Members of our Inner Circle service ask us a lot of very interesting questions. For example, one member was buying a new home at what he considered to be an extremely attractive price. However, he had not yet sold his current home. He worried about the risk of owning two homes, even for a few months. He wanted to hedge against a drop in the value of his existing home in the period before it sold. To hedge against this Canadian real estate investing risk, his broker suggested that he buy some put options on Bank of Montreal stock....
In our new report, Mutual Funds Canada: Inside the Top 10 Canadian Mutual Funds, we spotlight the top 10 Canadian mutual funds for your portfolio. But that’s not all. We also show you how we selected these funds, and strategies you can use to find funds that are capable of weathering a market slump, and profiting anew when the market turns up again. Perhaps more importantly, we show you what danger signs to look for when investing in mutual funds. For example, we think you should avoid funds whose managers practice a sector-rotation approach....
It’s particularly easy for investors to make costly mistakes during the year-end tax-loss selling season. That’s because the lure of a lower tax bill can be a temptation to dump high-quality stocks that are near the end of a downturn, and are set to move back up. A similar pitfall exists during the end-of-the-year rush to take advantage of certain tax shelters, including charitable donations. In our view, you should be as selective about giving money to charity as you are about buying stocks. In fact, bad charities tend to have something in common with bad stocks.
Examine a charity’s “business plan” before donating
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When investors are just starting out, they typically have modest amounts of money to invest. You can start your stock portfolio with as little as $10,000, say, but keep in mind that the less you invest at any one time, the higher the percentage your broker’s minimum commission takes from each trade. (Starting and building a portfolio, and how many stocks you should own at each stage of your investing career, are just two of the stock market basics we explore in our free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.” You can get a copy absolutely free. Click here to claim yours now.)
Stick to these stock market basics as your portfolio grows
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When you analyze a stock, it’s important to have an idea of how likely it is to survive a business slump and go on to prosper when economic growth resumes. A number of factors can help you to do that. These include the interest rate on the company’s debt, how sensitive it is to economic cycles, its advantages and disadvantages in relation to competitors and so on. (These are just a few of the factors we take into account in our stock market research when we manage the portfolios of our Successful Investor Wealth Management clients.) Many successful investors start their stock market research on a company by looking at its debt-to-equity ratio. This ratio comes in several variations, but the basic idea is that you measure a company’s financial leverage by comparing its debt with its shareholders’ equity....