diversification

As you probably know, our Successful Investor business model has two parts. We publish investment advice through The Successful Investor Inc., and we manage investor portfolios through Successful Investor Wealth Management Inc. (These two companies are affiliated by common ownership; I own both but keep them separate for regulatory purposes.) This two-business model has advantages for our subscribers. The problems we encounter as money managers, and the solutions we come up with, help us to give our readers unbiased, practical advice. This serves as a counterweight to advice you may encounter elsewhere that is based on misapplied theory, or tainted by conflicts of interest. For instance, an investor recently told me that he sold half of his Canadian Pacific stock after it doubled for him. His broker didn’t object and in fact complimented him on his conservative approach....

When your choose investments from the Resources sector, it’s a mistake to zero in on any one commodity, such as oil. Far better to give yourself exposure to several different commodities. Diversification within the sector cuts your risk without hurting your profit potential. In addition, remember that you can profit from the ongoing Resources boom by investing in companies that sell to businesses in the sector. Here are five top buys for exposure to the boom in Resources....

As a rule, we feel North America’s stock markets provide all the diversification that most investors need. However, a handful of foreign investments are attractive enough to be worthwhile buys, especially when they trade on New York as American Depository Receipts or ADRs. TOYOTA MOTOR CORP. ADRs $116 (New York symbol TM; WSSF Rating: Above average) is Japan’s largest automobile maker, and the world’s second-largest after General Motors. Sales outside of Japan account for 60% of the total. Toyota also makes industrial equipment such as forklifts, and pre-fabricated housing. Like most automakers, it offers vehicle loans through its financing division. Each Toyota ADR represents two of Toyota’s common shares. Japan imposes a 15% withholding tax on dividends paid to U.S. stockholders....

In evaluating investments, many investors focus on what we’d call ‘investment outputs’, such as earnings, dividends, cash flow, return on equity, sales growth and so on. These are all important, of course, but you shouldn’t focus on them to the exclusion of what you might call ‘investment inputs’, such as the factors we use in assigning our Successful Investor quality ratings. Investment inputs are harder to work with than investment outputs, since it takes a judgment call to determine their risk or value. To give you a better idea of what we mean, here’s a list of a dozen investment inputs that we look at before recommending an income trust:...

We assign companies an SI Rating using a point system that’s based on nine key factors: profit and dividend history, balance sheet strength, industry prominence, geographical diversification, freedom from excessive regulation and business cycles, and the ability to profit from secular trends and habitual behavior. We constantly review these ratings, and make changes accordingly. In the late 1990s and the early part of this decade, INCO LTD. $54 (Toronto symbol N) struggled as the Asian economic crisis led to lower nickel demand and prices....

MANULIFE FINANCIAL $73 (Toronto symbol MFC; SI Rating: Above-average) sells life and other forms of insurance, as well as mutual funds and investment management services. It operates in 19 countries and territories worldwide. Manulife has assets under administration of $372.3 billion. Manulife acquired New York-listed John Hancock Financial Services in 2003 for $15 billion in shares. The merger was one of the largest ever in the life insurance industry, but the integration has gone smoothly. John Hancock continues to add to Manulife’s sales and profits in the U.S. In the three months ended December 31, 2005, Manulife’s earnings rose 18.3%, to $900 million or $1.14 a share, from $761 million or $0.93 a share a year earlier. Revenue rose 3.6%, to $8.20 billion from $7.92 billion. The shares yield 1.9%....

We’ve said for some time that insurers are riskier than they look. Insurance has a stable image, but it has always been highly competitive and volatile. For safety-conscious investors, right now we recommend just three Canadian insurance companies as buys: Manulife Financial, Great-West Lifeco and Sun Life Financial. GREAT-WEST LIFECO $29 (Toronto symbol GWO; SI Rating: Above-average) is a leading Canadian insurance company, with $177.3 billion in assets under administration. The company also provides wealth management and other financial services. It also operates in the U.S. and Europe. Power Corp. of Canada controls about 75% of the company’s common stock. Great-West’s earnings in the three months ended December 31, 2005 rose 10.3%, to $469 million or $0.53 a share from $423 million or $0.48. Revenues rose 13.6%, to $6.52 billion from $5.74 billion....

Our Successful Investor rating system uses nine key factors to judge a company’s investment quality. They 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, like the falling cost of computers; and the ability to cash in on customer buying habits. Rating a mutual fund is harder, because funds are a step removed from these factors. Before we recommend a fund, we assess its quality or vulnerability on 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 its diversification across the five main economic sectors— Manufacturing & industry, Resources & commodities, Consumer, Finance and Utilities....

While telephone companies already have learned to live with long-distance competition, they now face local competition as well. New technologies such as Voice-over- Internet Protocol (VoIP) are a threat to BCE and Manitoba Tel in both long-distance and local service. We think both companies will prosper despite the competitive threats. Still, to lower risk, income-seekers should spread their utility-sector investments out among the three main segments of the Utilities economic sector — telephone companies, pipeline operators and electric companies. You should own phone stocks only if they are part of a balanced portfolio, and you also have diversification within the utilities sector. In addition, we advise against holding more than 10% of your portfolio in phone stocks.