October 31, 2013 Comments

Thursday saw the S&P 500 down 0.4% and Toronto down 0.7%.

Not a scary day for our stock picks though, not with Stantec up 6.5% to $61.96 on a good earnings release. We rated it Buy in August at $50.46. I’d be more inclined to sell or trim at this price and in fact I did trim my position as noted in the daily comments. I still have some in a taxable account where I have been following a rule of buy and hold because I don’t wish to trigger capital gains to be paid or even the work of reporting the gain on my tax return. But maybe I will decide to sell that… I will update the report before long.

Canadian Tire ended the day down very slightly. But this morning it was up a little and I decided then to trim a little of my position. The more stocks I trim the more I have to think where can I invest the money. (Given I already have big exposures to my favorite few stocks). But it does seem prudent to trim on big gains. I’m content to sit on some cash for a while.

Stantec has been a real winner for a long term buy and hold investor. I first added to this (then brand new) web site in August of 1999 rating it Strong Buy at (split-adjusted) $2.50. And the thing is it was actually a pretty obvious bargain, then selling for 10 times earnings and 1.22 times book value. In those days everyone wanted Nortel and Cisco and their ilk and boring companies like Stantec were unloved. Also Stantec was quite small at that time and therefore was under the radar. Having been originally rated a Strong Buy at $2.50 in 1999, Stantec rose $3.81 today. TODAY!. That is the power of a strong ROE and compounding at work. Note that Stantec was volatile over the years. It was not always easy to sleep for those holding a big position in Stantec. Those who bought on major dips and sold on big rallies would have been well rewarded. But I suspect none in reality would have done as well as someone who simply bought and held. See graph.

It’s been a remarkable year for our stock picks so far. Right now it seems reasonable to be looking to trim positions with big gains and try to catch our breath and see what stocks still seem to offer good value.

Not all the stocks on the lost above have very recent report dates. But the two strong Buys do. I continue to like Wells Fargo and Melcor as the two best picks right now. Note that Melcor is thinly traded meaning you can’t really trust a price change of say 2 or 3%, that can just be noise. You can easily over-pay by at least 2 or 3% if you are careless placing an order for a thinly traded stock like Melcor. Don’t use a buy at market order or sell at market. Enter a reasonable price in an order and try to be patient. Of course there are no guarantees and if the whole market should turn down then these two stocks would be pulled down as well. And of course every company can report bad news at any time. Those are risks we must accept if we are to invest in individual stocks and especially if we run concentrated portfolios.

In investing, it’s probably fair to say that good returns usually require us to take risks. And risk means it might not be a good return, it could be a poor return. And contrary to what some say, it does not work the other way. Taking risks in no way shape or form guarantees a high return. If it did it would not be risk. And also many risks are just stupid risks and are not associated with high returns. Only the right types of risk are (usually) rewarded.

For more information on risk, see my articles on that subject.

portfolio theory

and

Risk and Reward