Now is a good time to invest in copper–and here’s how to pick the best stocks
Traditionally, people invest in copper as a way to profit from general economic growth. Copper has a wide range of industrial uses (unlike gold and silver, which are thought of more as hedges against inflation). Copper is heavily used in the power-transmission and construction industries, in cables, wires and plumbing.
After dropping to as low as $2.17 U.S. per pound in mid-March 2020, copper rose steadily to a record price of $5.02 on March 6, 2022. Fears of supply chain disruptions and historically low stockpiles amid rising copper demand drove prices higher.
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However, the price of copper has since pulled back to $4.49. That’s mostly on concerns that high interest rates will continue to slow global economies. As well, investors worry about the pace of China’s economic recovery.
Longer term, the outlook for copper looks positive. From a supply standpoint, due to a lack of new mines, long-term copper shortages could result. As economies recover, they will push up demand—and that includes demand from segments such as electric vehicles (EVs) and green-energy related operations.
Copper’s industrial uses give it an advantage over gold and other precious metal stocks
Stocks of firms that produce base metals, including copper, generally have higher dividend yields than gold stocks. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets fall. That’s just another way of saying they can be considered somewhat less risky than gold and other precious metals.
As mentioned, copper should benefit not just from rising demand, but also from tightening supply. In the short term, labour problems and technical delays will continue to slow global copper production.
Over the longer term, ore grades are also falling at many major mines around the world as producers use up the easy-to-mine ore zones in their copper deposits. Environmental issues are also making it harder for companies to acquire permits for new mines.
To sum up, we like copper’s long-term prospects. But as always, stay out of promotional penny mines that are merely drilling for copper. Also stay out of investment vehicles (like options or futures) that will only make money for you if copper keeps going up in the short term.
All in all, most investor portfolios can include exposure to the Resources and Commodities sector of the economy, and that includes copper stocks. At the same time, though, resource stocks (and this includes oil and gas, of course) should in general make up only a limited portion of your portfolio.
Do you invest in copper? Why or why not?
Successfully playing the stock market — like chess—is never about going for broke.
Many investors like to use analogies from sports or the military to describe their investment approach, so they’ll often use the phrase playing the stock market. But if I had to compare our investing approach to anything outside the investment business, I’d choose chess.
Good chess players never “go for broke,” as the saying goes. Instead, they try to position their pieces so they can profit from the mistakes they expect from opponents who are less talented, less experienced or less patient.
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Successful investors follow a comparable approach. But the crucial difference is that they have no opponent who can be relied upon to make mistakes.
Instead, successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably come to well-established companies operating in relatively free economies in relatively prosperous times.
Four key points to sum up the basics of successfully playing the stock market
At the same time, it’s essential to diversify, as you do if you are investing your money with our three-pronged investment approach of targeting well-established companies, spreading your investments across most if not all of the five economic sectors, and avoiding stocks in the broker/media limelight.
In addition, successful investors need to limit their involvement in trouble-prone areas like new issues, start-up companies and illiquid investments.
They need to stay out of companies in which they have doubts of any sort about the integrity of insiders.
They also need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the 2000s, or today’s social media stars.
In fact, you could sum up the basics of successful investing quite simply in four key points:
Don’t depend on luck to make money for you or to prevent losses.
Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
Don’t do anything stupid.
Win by not losing.
How many stocks should you hold in your portfolio?
You’ll hear all kinds of advice pertaining to the number of stocks you should hold in your account when you start playing the stock market. We recommend that you invest initially in a minimum of four or five stocks—one from each of most, if not all, of the five main economic sectors (Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer).
You can buy them one at a time or over a period of months (or even years), rather than all at once. After that, you can gradually add new names to your portfolio as funds become available, taking care to spread your holdings out as we recommend.
When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1-million range, 25 to 30 stocks is a good number to aim for. For a mature portfolio, 40 stocks is a good upper limit.
Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes to your holdings. That won’t matter if you follow our three-part prescription of mainly investing in well-established companies; spreading your money across the five main economic sectors; and downplaying stocks that are in the broker/media limelight.
There is a reason why our upper limit for any portfolio is around 40 stocks. Any more than that, and even your best choices will have little impact on your personal wealth.
Be smart while playing the stock market and avoid diluting your profits with mutual funds
Some investors prefer to hold stocks through mutual funds or ETFs. However, many fund investors routinely hold more than 40 stocks through their fund holdings. That’s because they often invest in 10 or more individual funds, any one of which may hold 50 to 100 stocks. There’s a lot of overlap in stocks between funds, of course, but this still represents far too much diversification.
When you hold too many stocks, you spread your money out too thinly and condemn yourself to mediocre results, at best. The best you can hope for is a long-term return that more or less equals the market, minus the average mutual fund MER (the yearly cost of investing in most funds) of 2.5% to 3%.
All of these points relate to our analogy of the intelligent chess player’s approach to investing. Successful investors playing the stock market will set up a portfolio that can tap into the best opportunities in the market, under all market conditions—instead of just reacting to events in the market and the economy and hoping you’ve made the right moves.
Are you a new investor who has just started playing the stock market? What other topics would you like to hear about? Share your thoughts with us in the comments.
This article was originally published in 2017 and is regularly updated.
Here’s what we think about real estate investing in Canada — and it may surprise you
We’re constantly asked about real estate investment in Canada (or investment in Florida real estate, for that matter), and we understand the appeal. Even though today’s house prices still remain high in most markets (i.e., Toronto and Vancouver) mortgage interest costs are expected to fall as inflation comes back down. And owning your own home has a number of advantages.
In terms of real estate investment, owning your house is a great tax shelter. That’s because gains on your principal residence are exempt from capital-gains taxes. Note, though, that this benefit only applies to your principal residence, and not investment in Florida real estate as a second home or income property. You must still pay tax on gains on the sale of a recreational property, such as a cottage or a ski chalet. But these properties generally appreciate at a much slower rate than, say, a home in a major urban centre. That’s a key consideration with any real estate investment.
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Many investors underestimate the risk and cost of owning rental property
Capital-gains taxes are also applicable to gains on real estate investment, such as rental properties you buy for investment purposes. Moreover, this type of real estate investing in Canada (or investment in Florida real estate) involves a number of other commitments that can make it feel more like running a small business than, say, investing in stocks. With stocks, you only have to tell your broker to buy—everything else is done for you.
In contrast, when you own rental property, you have to spend time finding and dealing with tenants, arranging for maintenance, doing the accounting and so on. You can hire others to do these tasks for you, but that can get very expensive.
Moreover, real estate investing in Canada can entail higher levels of risk than stocks. That applies to investment in Florida real estate and other U.S. sunshine destinations. Simply put, all real estate investment must contend with the fact that real estate is less liquid, more expensive to manage and to buy or sell, and highly geographically concentrated. Rising crime, unpleasant neighbours and other changes on the street or in your property’s neighbourhood can make it hard to find tenants or buyers. So can physical problems, like adverse traffic patterns, backed-up sewers and zoning changes that allow undesirable development, or limit what you can do with your real estate investment property.
Many real estate investing enthusiasts say that if you buy a property with a 20% down payment (which is the Canadian government’s proposed new minimum to qualify for government-backed mortgage insurance on a property that is not your principal residence), then a 20% rise in the property’s value means you have doubled your money.
However, that claim neglects the costs of selling (up to 5% or 6% for real-estate commissions, plus lawyer’s fees and related costs). It also overlooks any negative cash flow you may have experienced while you owned the property, because rents failed to cover expenses. When you’re less familiar with the market, such as with Canadian investment in Florida real estate, that kind of unfavourable outcome is more likely.
REITs can kick start your real estate investing in Canada
We continue to believe that ownership of a primary residence is all the real estate exposure most investors need. Still, we get many questions about real estate investment beyond that. If you want to add to your real estate holdings, one good way to do it is through real estate investment trusts, or REITs.
Real estate investment trusts invest in income-producing real estate, such as office buildings and hotels. Some may even focus on investment in Florida real estate or other key U.S. markets for vacationers. Generally, that’s a segment of the market that is difficult for most investors to access through direct ownership of property. Moreover, real estate investment trusts save you the cost, work and risk of owning investment property yourself.
If you’re interested in real estate investing in Canada through a REIT, we still recommend RioCan Real Estate Investment Trust (symbol REI.UN on Toronto). It, like all REITs, continue to suffer fallout from the COVID-19 pandemic. Still, RioCan continues to benefit from an increasingly solid portfolio of properties now focused on Canada’s biggest markets. It is also working to diversify its portfolio beyond malls (these malls feature large stores that are usually part of a chain). We cover RioCan in our Successful Investor newsletter.
The best real estate investment trusts have good management and balance sheets strong enough to weather an economic downturn. They also have high-quality tenants, and they carefully match their debt obligations with income from their leases. The best ones are still doing well, despite the economic slowdown, and are taking advantage of low interest rates to refinance long-term mortgages.
If you’re investing in real estate primarily for profit, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Real estate investments like these can give you current income, plus long-term development possibilities. That’s a potent combination for patient investors either here in Canada or for investment in Florida real estate, for example. And of course, location is the most crucial part when it comes to real estate investing in Canada, the U.S. or in any country.
Have you used real estate investing in Canada as a way to diversify your investments?
Share your real estate investment experiences with us in the comments.
This article was originally published in 2016 and is regularly updated.
If you are wondering how to determine a stock’s value, make sure you aren’t misled by investing formula strategies or an over-reliance on financial ratios or other value indicators
When they first set out to find stocks to buy, many investors decide to base their investment decisions on a handful of measures. However, the best investment plans or systems use a variation of our value investing approach. That is, they revolve around choosing high-quality investments and diversifying their holdings. Our three-pronged value investing program takes that general description a little further.
Meanwhile, when you’re deciding how to determine a stock’s value, you could include measures such as financial ratios—but don’t over-rely on these indicators.
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What you need to know about investment indicators/formulas and how to determine a stock’s value
Most formulas start with a seemingly reasonable proposition about bargains in the stock market. The formula may depend on value factors such as a low stock price, a low P/E ratio, a high dividend yield, or a low ratio of stock price to book value. Or it may be based on foreign-exchange rates, long- and short-term interest rates, or price-change statistics.
Investing formulas all come down to something like this: If you make a particular trade or trades on a regular schedule, based on these fixed criteria, and stick with the formula and schedule for a number of years, you’ll earn above-average profits with relatively low risk.
The support for these claims comes from “back-testing.” That is, formula promoters check historical records to see how the formula would have worked in the past. Often they tinker with the formula and back-test different versions of it, over a variety of historical periods, and only tell investors about the results of the tests that generated a profit.
Investment professionals sometimes refer to this formula-creation process as, “first-you-shoot-the-arrow, then-you-draw-the-target-around-it.”
The problem is that the formula can only work in the future if there’s some consistency in the relationship between the elements in the formula and the outcomes of the trades. You can spot that consistency when you study the past, but it may be due to a unique series of coincidences. You can’t predict how long (or if) anything similar will appear in the future.
Our readers and clients sometimes come across an intriguing formula that seems to have worked in the past, and ask if it’s worth a try. We advise against it. We can’t see how it can add any value. After all, it’s akin to a bet on a randomly generated number.
An additional negative is that formula-investing fans only expect their formula to pay off for you “on average,” if you apply it consistently over a period of years. However, committing to a series of financial decisions for years ahead is always a risky procedure.
If you commit to a formula-investing schedule just when the chain of coincidences dries up, you could be in for years of financial and psychological pain.
How to determine a stock’s value: Four ratios we look at as part of our stock selection process
Debt-to-equity: When a company loses money, it still has to pay the interest and eventually repay the debt. Generally it does so by dipping into shareholders’ equity. A high ratio of debt to equity increases the risk that the company (that is, the shareholders’ equity in the company) won’t survive a business slump.
Price-to-book-value ratios: The book value per share of a company is the value that the company’s books place on its assets, less all liabilities, divided by the number of shares outstanding. Book value per share gives you a rough idea of the stock’s asset value.
Price-cash flow ratios: Simply put, this is earnings without taking into account non-cash charges such as depreciation, depletion and the write-off of intangible assets over time. It can actually be a better measure of a company’s performance than earnings.
Price-earnings ratios (or p/e ratio): The p/e is the ratio of a stock’s market price to its per-share earnings. As a general rule, the lower the p/e, the better, and generally a p/e of less than 10 represents value.
How to determine a stock’s value with our Successful Investor philosophy
Psychologists tell us that people instinctively look for patterns in their environment, such as, “When the animals in the jungle go quiet at night, a predator may be coming to eat us,” or, “When it gets cold, we can stay alive if we walk in the direction that the birds are flying.”
This kind of pattern detection helped our ancestors make sense of the physical world and avoid its dangers. It helped us survive through prehistory. But in the modern world, when we pursue intangibles such as investment success, it’s all too easy to detect patterns that exist only in our imaginations.
Many of the factors that investment formulas rely on do carry important bits of information, of course. They can help your investing, but only if you put them in perspective. When you use them in a fixed investing formula, they can do more harm than good.
It makes far more sense to disregard formulas. Instead, practice our TSI approach to investment success: focus on investment quality and diversification, and stay out of the faddish and fashionable stocks you’ll find in the broker/media limelight. This won’t give you a sure profit or a peephole into the future, but those are impossible goals. You’re better off to focus on the achievable goal of succeeding as an investor.
What value points do you look for the most when considering stocks?
Do you ever use formulas by themselves to make decisions on stock purchases? How has that worked out?
The best TFSA investments provide you with tax advantages, but market volatility highlights the need to pick your investments wisely; the best investment for TFSAs are those with the strong potential for solid and dependable gains
Tax-free savings accounts (TFSAs) let you earn investment income—including interest, dividends and capital gains—tax free. Unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.
Here’s a look at some of the best TFSA investments you can make to ensure you’re getting the maximum profit—and tax benefits—from your account.
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The best TFSA investments and how to choose between investing in a TFSA and a registered retirement savings plan (RRSP)
Your TFSA can generally hold the same investments as an RRSP. That means the best investment for TFSAs include cash, mutual funds, publicly traded stocks, GICs and bonds.
As mentioned, contributions are not tax deductible, as they are with an RRSP. However, withdrawals from a TFSA are not taxed. This means the best investment for TFSAs is generally focused on helping you meet shorter-term savings goals.
If funds are limited, you may need to choose between RRSP and TFSA contributions. RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.
Investing in a TFSA in low income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.
Over the years, as the value of your TFSA increases, you could switch to a portfolio of conservative, mostly dividend-paying stocks spread out across most if not all of the five main economic sectors.
The best TFSA investments include ETFs, especially when you are first starting out
When you are first starting out with your TFSA, or making small monthly contributions, low-fee index funds are among the best investment for TFSA investing.
Over the years, as the value of your TFSA increases, you could switch those funds into a well-diversified portfolio of conservative, mostly dividend-paying stocks.
Just remember to follow our three-part Successful Investor philosophy with your overall portfolio—including your TFSA:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
The best TFSA investments don’t necessarily include Blue chip stocks and dividend-paying stocks
One of the best ways of picking a quality Canadian blue chip dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.
For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada.
This means that dividend income will be taxed at a lower rate than the same amount of interest income.
Note, however, that this dividend tax credit–which will cut your effective tax rate—is only available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA.
The best TFSA investments are not high-risk investments
Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. (Outside your TFSA, you can use capital losses to offset taxable capital gains.) You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls. That reality is key to determining the best investment for TFSA investing.
So we think you are best to hold lower-risk investments in your TFSA. That’s because as mentioned, you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains.
What is one of the best investment for TFSA that you’ve made?
What mistakes have you made with your TFSA, and how have you corrected those mistakes?
This article was originally published in October 2018 and is regularly updated.
Looking for penny stock trading indicators that will boost your odds of success? Here are the key ones to watch for
Buying low-quality penny stocks is one of those things that can appear to be successful before it goes badly wrong. Some investors get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.
Here are some penny stock trading indicators that can help improve your odds of finding the best of these risky investments.
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Penny stock trading indicators and the quality of your investments
The Successful Investor approach revolves around choosing high-quality investments and diversifying your holdings. Our three-pronged Successful Investor program takes that general description a little further. In addition to spreading your investment money out across most if not all of the five economic sectors, we advise you to invest mainly in well-established companies, and focus on companies that are outside the broker/media limelight.
While they can from time to time soar quickly, Canadian penny stocks are quick to fall just as fast when a bubble bursts. For instance, two decades ago, buyers of Internet start-ups made far more profit than investors who stuck with well-established companies. The same thing happened when many investors bought low-quality resource stocks in 2007 and 2008, and it has happened in the past in penny stock bubbles. When the bubble bursts, however, prices of low-quality stocks inevitably come crashing down. After all, it’s much easier to launch a stock promotion than it is to create a successful, lasting business.
Penny stock trading indicators: Start by recognizing that penny stocks are often marketing campaigns in disguise
Penny stocks do sometimes pay off, but there are many pitfalls to avoid. You should be aware that many penny stocks are little more than very well-executed marketing campaigns.
Lots of penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts and self-produced promotional newsletters.
Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a very healthy dose of skepticism.
Penny stock trading indicators: Understand that claims of major company involvement may be distorted
Penny stock promoters love to make deals, however small or indirect, with major household-name companies. They’re sure the public is far more likely to buy penny stocks that have agreements with large well-established clients. The penny stock hopes that the link with a major brand will give them instant credibility, even if it far from guarantees any sales or profits.
For example, a mining penny-stock may promote that Newmont Corp., BHP Group or another major mining company has decided to finance the exploration of their mining claims.
However, when promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is. Instead of announcing that the big company has invested, say, just $50,000, a stock promoter may issue a press release saying the two companies have entered into a “multi-stage development plan.”
The release may say the major company has agreed to spend “up to $10 million” or some other exalted figure.
Above all, remember that big companies have far more bargaining power than individual investors.
A big company doesn’t go into a situation like this the same way you do. If the big company agrees to spend $50,000 to study the mining property, new technology or pioneering program, it will also insist on a series of options that let it invest ever-larger sums on favourable terms. But the big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.
Do not be fooled by predictions of success with penny stocks
Predictions never work out as well as hard facts.
You see this again and again in investing. For example, stock market predictions are terrible at determining what actual changes will take place in an industry. It’s even harder to predict how long those changes will take to appear. Of course, adverse changes are hardest on companies with bad financing, poor products, weak management or other drawbacks. Meanwhile, successful companies figure out ways to adapt and even profit from change.
Most successful investors agree that it’s a good idea to base investment decisions on facts rather than stock market predictions. You can make mistakes with facts, of course, but predictions have a much higher failure rate.
What indicators do you look at to determine if a penny stock is a good buy?
Unlocking superior returns with small-cap stocks involves navigating the high-risk, high-reward landscape.
Investing in small-cap stocks can offer the potential for superior returns compared to their larger counterparts. However, this opportunity comes with inherent risks. Shares of smaller companies tend to be more volatile, less liquid, and may experience prolonged periods of underperformance. During times of market turbulence or downturns, small-cap stocks are particularly susceptible to heightened volatility.
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Do small companies have an edge?
Small companies trading on U.S. stock exchanges are typically defined as having market caps between $300 million and, say, $2 billion. That range is generally higher than for many other markets, including Canada. For the most part, index providers define small stocks as those in the bottom 5% to 15% of the market value of the investment universe.
While smaller companies do not have the scale and influence of big-cap stocks, they can sometimes react more quicker to changing market conditions. They may also have less internal bureaucracy to deal with before making decisions. In addition, small firms, when they become successful, can become acquisition targets for larger companies.
Incidentally, it’s a mistake to generalize about small-cap stocks. Some are junk. Others are small companies that have a history of sales and earnings, and attractive growth prospects. Others are industry leaders that have small capitalizations only because they serve a small industry.
Small caps can generate higher returns
Over the past 20 years, global and U.S. small-caps delivered compounded annual returns better than the overall world equities index and the U.S. broad market. Despite being periodically dragged down by a large and often poorly performing mining and energy component, Canadian small caps also performed well, generating returns only slightly below the overall Canadian market.
However, over the past ten years, the large U.S. companies performed very well, leaving medium and smaller companies behind. Smaller companies also underperformed both globally and in Canada over the past decade.
Small-cap con: higher risk
While their returns have been higher over 20 years, the volatility, or risk of the returns, for small-caps is higher than the broad market. Canadian small caps are especially volatile.
During the big market meltdown between 2008 and 2009, U.S. and global small-cap stocks dropped more than U.S. large caps, while Canadian small-caps were more volatile as well.
Relative valuations
Given the relatively weaker performance of small companies over the past decade, it is no surprise that the valuations of the small companies trade at significant discounts to the larger companies.
Keep small cap stocks to a smaller part of your holdings
Small-cap stocks have a role to play in balanced portfolios, but investors should keep their exposure to these stocks at less than, say, 10% of their overall portfolios. Investors should also ensure they take quality, value and volatility into account when selecting stocks or small-cap ETFs.
Note as well that most ETFs focused on Canadian small companies suffer from an extraordinarily large exposure to the Resource sector. That can amplify the impact of any movement in commodity cycles.
What are your investing habits with small-cap stocks? Leave a comment below.
Finding out what old stock certificates are actually worth can be disappointing to say the least. Here is some stock market advice to make sure you never hold a worthless stock certificate.
One of our Inner Circle members asked for stock market advice about a stock certificate for Consolidated Denison Mines, a company that no longer trades on any stock exchange. Our research showed that Consolidated Denison had merged in 1960 with Can-Met Explorations and was renamed Denison Mines Corp. That company now trades in Toronto under the symbol DML. We gave him the number of the transfer agent for Denison Mines Limited to see if he could exchange his shares for those of the existing company.
Perhaps you have an old stock certificate like this in your files. The stock certificate may be registered in your name, or in the name of an earlier owner—a friend or relation who left it to you, or a total stranger. Is it worth something?
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One way to find out whether the stock certificate has any value is to try and deposit it in an account with a discount broker. If the issuing company’s corporate charter has been cancelled, the broker will reject the stock certificate and return it to you. If the stock has been taken over by another company, the broker may try to collect the securities or cash that the buying company paid for it.
Stock market advice: You don’t find pearls at the bottom of a junk drawer
Still, a stock certificate like this almost always turns out to be worthless (although they may have some value in the field of scripophily—the study and collection of stock and bond certificates). People take care of items that have some value. For stock certificates, that means keeping them in a safe deposit box, or with a brokerage account. Certificates of defunct stocks are more likely to be deposited at the bottom of a file drawer, “just in case they ever come back to life.” They don’t.
Another reason why most old stock certificates are worthless is simple arithmetic: It’s much easier to launch a company and sell stock to the public than to launch a business and make a success of it. That was truer decades ago than it is today—it’s now much harder and more expensive to launch a new public company. But it’s still easier than starting a profitable new business.
This highlights important stock market advice that can keep your buys from winding up at the bottom of an old file drawer:
It’s essential to invest mainly in well-established stocks with a history of sales and earnings, if not profits. If you break this rule and invest in, say, junior mines or Internet startups, you should only do so if you have a high opinion of the value of the junior’s assets and/or business plan. And you should buy the stock with money you can afford to lose. You could be mistaken about its value. Someone might eventually find your low-quality buys gathering dust at the back of a drawer and wonder if they were ever worth anything.
“Holding for the long term” only pays off with investments in high-quality, well-established companies. If you buy low-quality or speculative stocks, time tends to work against you. The longer you hold them, the likelier you are to lose money.
Follow long-term investment strategies for picks that won’t end up in a dusty attic
Finding old stock certificates that are worthless can make you feel like stock market investing is a mistake. It might indeed be a mistake—but only if you have nothing but long shots in your portfolio—that carries a high probability of you making meagre returns or losing money over long periods, rather than making the extraordinarily high returns you seek.
That’s why you need to be particularly cautious and selective when adding anything to your portfolio that offers the potential of those “extraordinarily” high returns. This advice is especially applicable to new investors, who may seek outsized returns from investments such as IPOs, penny stocks and stock options. These market vehicles are virtually certain to hold you back from long-term investment success.
Put compound interest—earning interest on interest—at the core of your investing strategy and it can have an enormous ballooning effect on the value of an investment over the long-term.
Compound interest can be considered one of the wonders of the investment world. This tip is especially important for young investors to learn. The benefits apply to both stock and fixed-return, interest-paying investments, like bonds. When you earn a return on past returns from stocks (both capital gains and dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.
To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions. If you’re losing out on (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.
Be aware that the markets for fungible goods like oil, interest rates and gold are inherently unpredictable, and make a volatile addition to your investor portfolio
Markets like these are so enormous that there is no practical limit to how much you can trade in them. It follows that if you could predict their prices movements, you could wind up acquiring a measurable proportion of all the money in the world, and nobody ever does that. That’s why it’s a mistake to build your portfolio in such a way that you have to accurately predict the future direction of fungible goods like oil, interest rates or gold. The key to being a Successful Investor is to invest in well-managed companies. The unpredictability of the market facilitates the need for this rule. Well-managed companies can weather financial downturns and market downturns better than other companies.
You can follow our safety-conscious advice in the Canadian Wealth Advisor. That’s where we recommend stocks with built-in value that limits losses during downturns—and produces superior gains over time as markets rebound.
Have you ever found a box of old stock certificates? What did you do with them? Share your experience with us in the comments.
What stocks have you bought that have so little value you could forget about them?
This post was originally published in 2014 and is updated regularly.
The dangers of online trading don’t get much play in the media when addressing how to buy stocks for dividend growth, but online trading does indeed carry hidden dangers that aren’t always evident at first.
The main risk comes from the fact that online trading may seem deceptively easy to those learning how to buy stocks for capital gains, dividend growth or both. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. That can lead you to sell your best picks when they are just getting started. It’s the opposite of what you’ll read in any TSI newsletter.
The apparent ease of online trading may even prompt conservative investors, primarily focused on sustainable dividend growth, to take up short-term trading or day trading. That’s just another danger of trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t get away from. Knowing how to buy stocks online the right way is key to Successful Investing.
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Online trading: Lower costs are attractive, but it’s investment quality that makes money
There’s a random element to investing that can be profitable for short periods. But you can’t reliably profit from it over the long term. In fact, most short-term traders wind up losing money. By the time their beginner’s luck fades, many are trading in dangerously large quantities.
If you think the answer to how to buy stocks successfully is frequent trading, beware. As all TSI newsletters point out, frequent trading can also lead you to buy lower-quality, thinly traded stocks. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly in online trading, and that cuts your commission costs. However, for successful investors, this is a bonus, not the object of trading stocks.
How to buy stocks successfully
It is far more important to focus on high-quality, well-established companies and how they fit in your portfolio. The longer you hold these stocks, the greater the chance that your profits will improve, as well.
Here are two other dangers to avoid in online trading. Both can seriously hurt the long-term returns that TSI newsletters focus on:
Practice accounts can breed false confidence: Some investors are nervous about trading stocks online. So, instead of jumping right in, they start off by using the “practice accounts” or “demo accounts” that the online brokerage industry initiated several years ago. Practice accounts are supposed to be identical to real accounts in all but one respect: you buy stocks in them with imaginary or “play” money, rather than the real thing. The brokerage industry says this gives would-be traders a free opportunity to learn how to trade online without risking any money. Using an online broker’s practice account, you can learn online trading essentials, such as how to enter an order to sell or buy stocks; how to double-check your order before submitting it, so you avoid obvious but common mistakes, like buying 10,000 shares when you only meant to buy 1,000; and so on. The big risk with practice accounts is that you’ll try out a risky and ultimately unwinnable investment approach, like day trading or options trading, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean. This will deliver losses instead of profits.
Automated stock-picking systems can backfire: Some investors who trade stocks online use automated stock-picking systems to help them make investment decisions. How to buy stocks successfully this way is harder to do. These systems are typically marketed with impressive-looking performance records designed to make investors think they are sure to make guaranteed profits. However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past. Automated stock-picking systems essentially do two things: First, they narrow down the data you use when you make investment decisions; second, they apply a fixed rule, or rules, to draw a conclusion or an investment decision from that selection of data. Unfortunately, the market’s key concerns continually change. Today’s good investments can turn into tomorrow’s dead ends. For a time, these systems seem to work, but that’s usually coincidental. If the market is going up and the system tells you to buy volatile investments, it automatically generates profitable trades. But they can just as quickly turn around and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to the investor relying on the system.
Bonus tip: Building a “buy and watch closely” portfolio
As our TSI newsletters point out, there are a variety of ways to build an investment portfolio. Some work better than others. But our buy-and-watch-closely approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well as they figure out how to buy stocks successfully.
We start by applying our three-part Successful Investor rule for portfolio construction:
Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.
When figuring out how to buy stocks, it’s important to also know when to sell them. In our TSI newsletters, we advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be, to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit for our clients.
Note: This post was originally published in 2012 and is regularly updated.
Here’s a look at the pros and cons of robo-advisors
Robo-advisors “promise” an easy route to investing.
You complete an online questionnaire set up to measure each person’s needs. Your response is designed to supply all the robo-advisor needs to know about you as an investor. For instance:
Age
Amount to be invested
Time horizon of your investment
Your risk profile.
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The robo-advisor then supplies a portfolio that fills those needs. The assertion is that each company’s proprietary algorithm claims to take the emotion out of investing and will grant the investor better returns at a lower cost than traditional financial advisors.
It is possible that this might work adequately in a few cases, say, for younger investors just getting started, usually with a relatively small amount to invest and an entry level knowledge of investing.
But for more mature investors who are shepherding their investments to meet their financial goals before and after retirement, serious doubts arise. First, you have little chance of getting a portfolio that is tailored precisely to you, in spite of the questionnaire. When you sit down with human beings to build a portfolio, the results are very different.
The mechanics behind automated investing
Robo-advisors typically aim to build what they see as well-diversified portfolios covering all the main asset categories. Each robo-advisor generally has five to 10 standard portfolios composed of ETFs that vary mainly by the amount of market risk that they carry, covering a spectrum from very conservative to very aggressive.
Each set portfolio usually includes asset categories that include investment-grade bonds, stocks (Canadian, U.S. and global) and sometimes also other asset categories such as real estate investment trusts, emerging markets equities and high-yield bonds.
Each portfolio is subsequently rebalanced automatically as needed whenever actual balances diverge significantly from their target allocations. But you are still getting a pre-packaged product. Essentially, you are getting an asset allocation model, or rather one of a series of asset allocation models.
Asset allocation stems from Modern Portfolio Theory, which grew out of a 1952 paper by a U.S. economist. He developed a mathematical model that emphasized the reduction of volatility by combining investments with different types of returns (i.e., stocks, bonds, cash).
The investment industry seized upon this and subsequent academic research on the subject. It quickly transformed it into a sales pitch for investment products carrying higher fees than so-called “plain vanilla” stocks and bonds.
Financial firms developed asset allocation funds–mutual funds that can shift their portfolio allocations between stocks, bonds and cash in order to capitalize on perceived investment opportunities in any one of those classes.
For example, if the managers are convinced the bond market is depressed and due for an upswing, they may invest heavily in fixed-income investments for a few months to take advantage of the change.
All of this is based on reading the markets, not serving the interests of individual investors. And since we know that the vast majority of fund managers fail to match market indexes, let alone beat them, this is not the best advertisement for future gains.
What’s more, you could just as easily acquire these investments on your own. Robo-advisors usually invest in index funds and ETFs. You could buy these investments and save the robo-advisor fee that is added on to the underlying fees for the fund or ETF.
Still, there are two arguments that could be made by the promoters of robo-advisors
The fees are lower than those you would typically pay for an asset allocation fund. This is true: they compare favourably to the low MERs you would pay for most ETFs. The question, of course, is whether you will get the best possible results for the fee (keeping in mind you could buy the ETFs yourself).
Robo-advisors do not force you to stick to the original profile you entered. You can edit your goals using their financial planning software.
However, you can’t talk to anyone who makes investment decisions for you. You are dealing with an algorithm, and an algorithm will never ask you whether you are anxious, optimistic, or pessimistic, or whether you feel there’s a particular concern you’d like to get off your chest.
It will always make decisions based on the enormous bank of data it is processing, not your personal concerns.
Perhaps someday artificial intelligence will create a robo-advisor that can sympathize with your anxiety about housing prices tapering off in your neighbourhood or an unexpected expense that has just cropped up. Or share your joy when you get a big boost in your returns.
But there’s an even bigger point to be made here. The investments fed to you by a robo-advisor will always be an approximation of your personal needs and goals. It will always be a model that cannot match the hopes, fears and dreams of each individual investor.
For that, you must talk to a human being. A human being who can respond by making specific decisions that will improve your portfolio, month by month and year by year. Someone who understands not only what your goals are, but what those goals actually mean to you.
Have you used a robo-advisor? What was your experience like?
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