INVESTORSFRIEND INC. NEWSLETTER MARCH 13, 2004
Don't Just Be Right - Be Rich!
One of the psychological barriers to investing is that we humans often get
more satisfaction out of being right than we get out of making gains.
For example many people would feel happier making 15% on each of three stocks
than they would of making minus 5% on two stocks and 100% on the third stock. In
the second scenario the investor is up a net 90%, while in the first, the
investor is up 45%. But in the 90% scenario two mistakes were made while in the
45% scenario no mistakes were made. Most humans get a certain amount of "psychic
income" from being right and would actually feel better about the 45% scenario.
We tend to mentally keep track of how many times we were right or wrong, rather
than simply focusing on the overall growth of our portfolios. And we want to
avoid being wrong. If we own a stock and it falls on bad news, then we are
reluctant to sell and admit we were wrong to buy it (even though it may have
been a good decision based on the information at that time).
We should think about doing what is best for our overall portfolio, not about
how many individual winners and losers we have. It might be smart to sell a
stock that you think will gain 10% in a year to move into one that you think
will gain 30%. If that happens then you were not wrong to sell the first stock
even if it did end up going up 10%.
Stock Market Direction
I don't claim any ability to predict the overall direction of the market.
However we have had a strong run until this week's setback. The market is
generally acknowledged to be at least fully, if not over-valued. So...it would
not be surprising at all to get a 10% or more decline. Off-setting this, the
economy still appears to be reasonably strong, corporate earnings have been
strong, interest rates have been declining and investors are generally more
willing to hold equities. In Canada, we have an additional up-side force as more
companies convert into income trusts. Overall, I am hopeful that the market will
be higher by the end of this year. However, high market returns can not last
forever and if it is higher at year end then it will be priced to yield only
about 7% on average after that. Remember bonds rise with falling interest rates
but then give low yields based on low interest rates after the rise. Stocks are
subject to exactly the same force except the pattern is obscured by a lot of
other factors driving stock prices.
Canadian Stock Market Sectors
All TSX sectors are up strongly in the last 12 months. Among the weakest (but
still strong) are Golds, Health, Consumer Staples and Utilities which returned
20 to 25% in the past 12 months (I believe these figures exclude dividends).
Most sectors were up 25% to 50% while the metals & minerals sector was up 78%
and the Information sector (which excludes telco) was up a whopping 123%). This
data is from today's Financial Post.
If you want to concentrate in investing in a particular sector then you could
use a mutual fund, particularly if you feel that a certain mutual fund manager
has a great track record and should continue to out-perform.
Exchange Traded Funds
If you like a certain sector but don't know which mutual fund to choose, then
an exchange traded fund can be very effective since the management fees that you
pay can be easily 2% less. This gives you a head start on the mutual fund
managers.
You can find a list of exchange traded funds on the TSX at
http://142.201.0.1/en/marketActivity/tse/marketInformation/structuredProducts/ETFs.html
Unfortunately, not every sector has an exchange traded fund. Canadian sectors
that I would be interested in include, the overall composite index, the
financial index, the energy index and the Real Estate Investment Trust Index.
Many of these indexes are available in two versions - regular or capped. The
capped index limits any one stock to (I believe 10%) of the index so that you do
not get ever-exposed to any one company when you are trying to be diversified.
Investing through exchange traded funds allows you to get good diversity
while holding only a very few funds and you avoid the high fees of mutual funds.
I also like exchange traded funds because you can move a lot of money in or out
of the market with good liquidity and at a low trading cost.
In my own case I rarely use exchange traded funds because I prefer to pick
individual stocks.
A close cousin of exchange traded funds is index mutual funds, these are
designed to track a certain stock market index but are mutual funds rather than
exchange traded funds. The management fees are higher than exchange traded funds
but lower than most mutual funds. Unfortunately I have not found a list of such
index mutual funds.
PICKING INDIVIDUAL STOCKS
Here is a link to my articles on picking individual stocks
http://www.investorsfriend.com/howtopick.htm
Those of you who are planning to buy individual stocks, (and are not already
subscribers) can access InvestorsFriend Inc.'s current Stock Picks for $10 per
month (and you can cancel at any time) at.
http://www.investorsfriend.com/Subscribe.htm
Performance is very strong and is updated
through March 12, 2004.
Current Strong Buys include two insurance companies, a mutual fund company
and a property developer.
If you do subscribe though PayPal and you feel that the research is not good
value for your $10, email me within 3 days of first signing up, with reasons,
and I will refund your payment. Of course InvestorsFriend Inc. can in no way
guarantee that the stock picks will move in the predicted direction (given all
the uncertainties in the market). In the past no subscriber has ever indicated
that the research was not good value for money. I trust that any refunds under
this new policy will be requested only in good faith.
END
INVESTORSFRIEND INC.