diversification

The Successful Investor value investing approach follows the basic model set by the old-fashioned Graham/Dodd approach. Basically, it tries to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When we recommend a stock as a buy, we first look to see if it meets these value-investing criteria. And a key component of our value-investing system is our ratings system, which identifies stocks with positive prospects and lower risk.

We have six Successful Investor ratings. The top rating is Highest Quality; next is Above Average; next is Average; below that, Extra Risk; below that, Speculative; and, at the bottom of the scale, our riskiest, lowest-quality rating of Start-Up.

We base our Successful Investor ratings on a system we’ve developed over the years. We use it to assign “quality points” based on nine key factors that successful investors use in value investing to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.

[ofie_ad]

...

Aggressive investing is an investing strategy that can yield high returns – but also entails taking on a lot of risk. An investment strategy that involves aggressive investing is only suitable for investors who can accept substantial risk, and the chance of losses.

The most common form of aggressive investing is to put a large part of your portfolio in stocks (or mutual funds) of less well-established companies without a history of earnings or dividends. Aggressive stocks don’t have the secure hold on the growing, or at least stable, clientele that conservative stocks have. When something goes wrong with aggressive investments, there is great risk of serious, if not total, loss.

We feel that the best investing strategy for most people is to hold the bulk of their investment portfolios in securities from well-established companies. All these stocks should offer good “value” – that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects when compared to alternative investments.

[ofie_ad]...

When we judge the investment quality of an individual company, we take nine key factors into account. These are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographical diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour. Mutual-fund ratings are more complex, since they are a step removed from these factors. Before we award our CWA Fund Ratings (Aggressive, Conservative or Income), we assess a fund’s strengths and weaknesses in several key areas. We start by looking at the quality of the fund’s holdings, based on our nine key factors. Then we look at the degree to which its holdings are spread out across the five main economic sectors: Manufacturing, Resources, Consumer, Finance and Utilities. Funds that focus on narrow segments are more risky or aggressive than those that diversify, even if they focus on a conservative area, such as Utilities....

We feel that most mutual-fund investors should own no more than five funds. When you own more than this, you run a higher risk of over-diversification. This could cause your portfolio to produce a return that matches that of the market, minus the 2% to 3% cost of fund-management fees and expenses. Bissett Multinational Growth Fund mainly invests in North American-listed companies that get a significant part of their revenue and earnings from international operations. The fund is okay to hold for exposure to the U.S. market, with indirect exposure to the global economy. Bissett Canadian Equity Fund holds mostly high-quality, large-capitalization Canadian stocks. The fund is okay to hold....

Should you stick with your current stock broker or switch to a discounter? To answer that question, you need to consider your own experience and abilities, and those of your stock broker. A good stock broker (one who is experienced, knowledgeable, and oriented toward the long term) is worth the top commissions you are likely to pay. For instance, suppose your average commission is 2% and you replace one-third of your portfolio every year (both figures are on the high side). In this case, you’d pay 1.34% of your portfolio’s value each year in commissions. That’s less than the 2% to 3% management fee on a typical mutual fund....

Dividend reinvestment plans (or DRIPs) are plans offered by some companies that let shareholders receive additional shares in lieu of cash dividends. DRIPs can be a good way to slowly build wealth over a long period, for a number of reasons. First, they eliminate the nuisance of receiving small cash dividend payments. Second, some of them let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many dividend reinvestment plans also allow optional commission-free share purchases on a monthly or quarterly basis. To participate in these plans, you have to buy one or more shares of a company’s stock, and get a certificate registered in your name. Share registration (through a traditional or discount broker) can cost $40 or more per company. Then you call or write the company to ask for the form you fill out to enroll in the plan....

Growth stocks are companies that are expected to have earnings growth above the market average. Frequently, growth stocks pay little or no dividends, instead re-investing any extra money to promote further growth. These are not to be confused with momentum stocks. Momentum stocks are stocks that are moving higher in the market. While individual definitions may differ, the overall goal from momentum trading is to profit from shorter-term trades. Momentum investors are particularly keen on the so-called ‘positive earnings surprise’, when a company outdoes brokers’ earnings estimates. They view a ‘negative earnings surprise’ — lower-than-expected earnings — as a sell signal. They use a variety of computerized formulas to make buy and sell decisions, but all come down to “Buy on strength and sell on weakness.” So they tend to pile into the same stocks all at once, and the gains that follow are something of a self-fulfilling prophecy....

Cautious investors wonder if they own enough different stocks, or perhaps even too many. The right number of stocks for investors to own for portfolio diversification depends, in part, on where they are in their investing careers. When they’re just starting out, most people have modest amounts of money to invest. Even so, it generally pays to invest at least several thousand dollars at a time, or the broker’s minimum commission will significantly lower profits....

MANULIFE FINANCIAL $20.15 (Toronto symbol MFC; Shares outstanding: 1.5 billion; Market cap: $30.1 billion; SI Rating: Above-Average) sells life and other forms of insurance, as well as mutual funds and investment-management services. Manulife operates in 19 countries and territories worldwide, and adminsters $385.3 billion in assets. In the three months ended September 30, 2008, Manulife’s earnings fell 52.7%, to $503 million, or $0.34 a share, from $1.1 billion, or $0.70 a share a year earlier. Sharp global stock-market declines reduced earnings in the latest quarter by $574 million. As well, losses due to exposure to defaulting issuers in turbulent credit markets totalled $253 million. This included losses on investments with Lehman Brothers ($156 million), AIG ($32 million) and Washington Mutual ($4 million)....

Canadian life-insurance stocks are down lately on investor concerns that the economic slowdown will continue to hurt their profits. As well, insurers use gains on their bond and stock holdings to cover future claims and to make up underwriting losses. They have suffered as the values of these securities have fallen, along with credit quality and stock markets. Manulife Financial has recently raised a substantial amount of capital, which will help it cope with the current downturn. It also gives it the flexibility to make acquisitions at bargain prices, especially from troubled U.S. insurers....