Investment Strategies: Types of Investment

Picture of a ‘BET’ push button with the heading ‘Warren Buffett’s Bet’ above it.

Investment Strategies:  Types of Investment

Hi friend! I am going to keep hammering away, until my message is finally heard – that the best way to profit from your portfolio investment over the long haul is to do what a good number of uber-investors are espousing, including Warren Buffett.

To prove his point, he made a bet pitting his recommended strategy against another, and guess who won?

No big surprise to me. 

Read on to find out what strategy Mr. Buffett was referring to.

People are always searching for answers as to how and where to invest their hard-earned money.

Well, look no further.

The answer lies in this blog post.

It’s called investing nirvana.

But first, let’s have a look at how the market is doing…

Still Climbing

It’s that time again… to evaluate where the market is headed.

This calculation takes into consideration the market’s current price, as it relates to a multi-day trailing average.

A ratio higher than one suggests that the market is rallying higher.

The theory goes that the forecast is stronger the higher the ratio.

Take Monday, October 23/17, for instance.

The VOO Vanguard S&P 500 ETF NYSE stock exchange closed at 235.30.

Its 200-day exponential moving average settled in at 219.45 at the close.

The resulting ratio of 1.07 is suggestive of a modest bullish signal. 


*** Expect More Upside ***

If you are wondering where the market will be this time next year, give this idea a whirl.

Not exactly what you would call a stock market outlook next 5 years, but I’ll take it.

The only caveat is that it does not predict market turns.

(Info via Nir Kaissar, Dec. 28/16, The Globe and Mail)

As you will read a little bit later on in this blog post, September and October are weak months for stocks on a seasonable basis (and seasonably strong months for government bonds).

Since 1950, the world’s most cited benchmark, the S&P 500, has lost ground during the month of September, on average.

However, this past September saw the least volatility ever for that month, which is a good proxy for the rest of this year (2017).

It was the first positive September since 2013.

Why shouldn’t the market keep on trekking up?

The economy in the U.S. is experiencing its best growth in two years, and the economy sees a 3.1 percent boost in GDP – the U.S. economy growing 3.1 percent in the second quarter.

Unemployment is low (lowest in 16 years), and 10%-plus returns on equity are being achieved.

Bond prices are still paying 2.3 percent.

Equity valuations may be on the high side, but there are still a lot of opportunities in stocks.

Seventy-four percent of all moves in the VIX under 10 have occurred this year.

The VIX has settled at its lowest level in history.

According to Warren Buffett, valuations make sense where rates are.

GOP hopes their tax cut plan will spark a major boom.

Go GOP go!

Up, up, and away! 


Table of Contents:

Is this you?
Warren Buffett’s Bet
Need more ammo?
All About Vanguard
Vanguard Canada eh?
Ronald S. Baron
Dead Wgt. Exceeds Winners
Index Funds & ETFs Redux
The Exclusive Approach
ETFs: The Way to Go
ETF Liquidity
Investing Words of Wisdom
Who could have guessed?
Disruptive Tech Stocks
Stocks That Glow
High-Dividend U.S. Stocks
Is value investing dead?
Correction vs Bear Market
The Loonie Effect
The Energy Effect
The Telecom Effect
The Greenback Effect
Major Currencies
Rising Interest Rates
Rising Bond Yields
Seasonal Swings
The Canadian Market
Emerging Markets
The Fourth Quarter
Did you know?
In Sum
Inspiration and Quotes
Disclaimer and Disclosure

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And now, let’s get down to the heart of this Investment Strategies:  Types of Investment blog post.

Is this you?

Picture of a lady fuming about her investment strategies with smoke coming out of her ears.

Fed up with your investment returns (or, even worse, losses)?

Then, pay attention to somebody who can help you below.

You may have heard about this guy before…

Warren Buffett’s Bet

Do you really want to bet against Warren Buffett? 

Not me, that’s for sure.

Ten years ago, he espoused inexpensive passive-index investing over active hedge-fund management by putting up a million dollars to prove his point, and put out the challenge to all comers.

Of all the types of portfolio investment, this is the one he prefers, and this is the best portfolio investment example I can think of.

Here was his bet:  “Over a 10-year period commencing Jan. 1, 2008, and ending Dec. 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of costs, fees, and expenses.”

Ted Seides, Protégé Partners LLC, took up the wager.

Poor guy!

The bet has another two-plus months to go but, given how far behind Mr Seides is, he has already thrown in the towel.

In his annual letter, Mr. Buffett explained that the S&P 500 index during that time period is up (including reinvested dividends, as specified in the bet) about 85 percent, or approximately seven percent per year.

During the same period, the best of the five funds picked by Mr. Seides is up 63 percent , the second best is up 28 percent, and the rest are up by less than 10 percent.

Mr. Buffett proved his point – being that the contest wasn’t necessarily about active versus passive, but rather cheap versus expensive.

This can be translated into a warning to all investors alike – that expensive advisers and hedge-fund managers are probably costing you a lot of money.

The takeaway from his bet – that costs matter.

In sum, inexpensive passive-index investing is the way to go.

(Info via Barry Ritholtz, as reported in The Globe and Mail, 22 Sep 2017)

My favourite index ETF is VOO Vanguard S&P 500 ETF NYSE (available as a fund in the U.S., but only as an ETF in Canada).

This is the best investment strategy I can offer up at this time and the best investment strategy for beginners I can think of.

For the record, I own it, and I will be buying more on the dips in price.

For more on this delightful fund/ETF, check out this blog post:

Stocks to Buy Today

So, don’t worry yourself into a puddle.

Just do as Mr. Buffett suggests.

Need more ammo?

Trailer fees are those hidden sales commissions that are paid to financial advisers.

The fees are paid to financial advisers by fund companies for selling their products to individual investors.

A typical Canadian fund has a one percent trailer fee that pays out each year for the length of time the investor owns the fund.

Such fees are often considered to be an indirect way Canadians pay for financial advice. 

(See what’s up in this regard in the U.S. at the end of this section.)

But, a concern is that they put advisers in a conflict of interest situation, in that they might be tempted to channel their clients’ money into funds that pay higher fees.

I know this for a fact. 

In my own case, my bank promotes funds that typically have an MER of 2.3%, failing to disclose the better fund that carries an MER of one percent.

I only found out about that fund by pressing my financial adviser at the bank on whether or not the bank offered an index fund, which is the better way to go.

Turns out they do, but they don’t publicize it unless you ask, of course, because it brings in less money for the bank.

Hmmmmmmm… are they really looking out for my best interests?

Obviously not.

I am now starting to invest in my beloved VOO Vanguard S&P 500 ETF NYSE initiated by John C. Bogle.

To find out more about it, read his delightful book, ‘The Little Book of Common Sense Investing.’

And, check out this blog post for more details:

Best Index ETF 

Getting back to the issue at hand, Douglas Cumming and co-authors did a study to see if that conflict of interest issue was real or not.

They found that investor money was being directed toward funds with higher trailer fees.

Secondly, they discovered that funds with higher trailer fees seem to achieve the worst performance, even before deducting the fees themselves.

They concluded that there was evidence of conflicts of interest that were not in the best interests of Canadian investors.

It is apparent that products paying above-market commissions attract higher sales.

It would appear that the best interest of the investor is not uppermost in the minds of advisers, meaning that the investor does not achieve an optimal outcome.

Whenever an investment decision is arrived at for reasons other than what is best for clients, harm is being done to them.

The good news is that regulatory reform is underway, but that won’t dissuade me from putting more and more of my hard-earned money into my favourite fund outside my bank – VOO Vanguard S&P 500 ETF NYSE.

Again, of all the types of financial investment available to us, this is my preferred choice.

BTW, regarding the much-maligned trailer fees mutual funds carry in Canada, I asked Rob Carrick of The Globe and Mail if such fees also exist in the U.S., or is this just a Canadian phenomenon?

Here was his answer:

“Hi Peter:

To a limited degree, the answer appears to be yes.

However, U.S. and Canadian fund fees are very differently structured.

Also, U.S. fees are much lower.

Here’s an SEC rundown on how U.S. fund fees work:  (see SEC link in References section of this blog post.) 


Rob Carrick”

I also asked Rob how close he thinks we are to seeing trailer fees disappear in Canada.

Here was his response:

“Not as close as I’d like, but the closest ever.”

All About Vanguard

Vanguard entered the Canadian market in 2012.

The closest domestic equivalent to Buffett’s recommendation is the S&P 500 Index ETF (ticker VFV, trading on the TSX), with a 0.15 percent MER.

That’s a bit higher than the ‘pure’ version trading on U.S. exchanges, although Canadians can also buy the American ETF version (symbol VOO).

It’s covered in this blog post:

A Better Way to Invest

Normally, Canadians can’t own U.S. mutual funds, but they can easily buy U.S. ETFs.

Vanguard Canada sells only ETFs.

It differs from its U.S. parent in that, at least in its early years, it has not offered index mutual funds custom-tailored to Canadian investors.

In addition to the VFV ETF mentioned above, it also offers the S&P 500 Index ETF (C$ hedged), ticker VSP, also with an MER of 0.15 percent.

That version hedges exposure to the U.S. dollar back into the Canadian dollar.

So, for Canadian investors, if the S&P 500 were to keep rising, but the U.S. dollar fell in value in relation to the loonie, Canadians would benefit from the U.S. stock exposure, but not suffer from the exchange rate.

On the other hand, if the loonie sank, and the U.S. dollar gained relative to it, Canadians wouldn’t participate in the gains in the U.S. dollar.

In that case, we would end up standing on one foot and kicking our patootie with the other, wishing we had gone with the un-hedged version, or the ‘pure’ Vanguard S&P500 index fund trading in the U.S.

(“All the major ETF companies offer both hedged and un-hedged S&P 500 ETFs that are listed on the TSX.  Hedged works best when our dollar is rising, while un-hedged is best when the dollar is falling.  Over 10 to 20 years, the results for both should be similar.”  R. Carrick, The Globe and Mail)

The ETF version of that fund is the Vanguard S&P 500 ETF (ticker VOO, trading on NYSE Arca), sporting what has to be one of the lowest investment management fees anywhere – 0.05 percent, or 5 basis points.

I covered this ETF in this blog post:

Vanguard S&P 500 ETF

Those who prefer index mutual funds (which are appropriate for smaller investors with automatic savings programs) can opt for Vanguard’s comparable S&P 500 index mutual fund, VFNIX trading in the U.S.

As mentioned before, Canadians can only participate in the ETF versions of Vanguard offerings – unfortunately not the funds themselves.

No matter which flavour, the largest American blue-chip companies are included.

The top five holdings of VFNIX are Apple, Exxon, General Electric, Johnson & Johnson, and Microsoft.

The holdings of Vanguard Canada’s VFV reflect slight differences, possibly because the holdings are as of different time periods.

As of June 30, 2014, the Canadian VFV’s top two holdings were also Apple and Exxon, but the next three for VFV were Google, Johnson & Johnson, and Microsoft.

The world’s greatest stock picker, none other than Mr. Warren Buffett himself, endorses the world’s greatest makers of index funds and ETFs – Vanguard.

(Info via Jonathan Chevreau, as reported in The Financial Post, 21 Aug 2014)

I, for one, am moving in that direction, having already bought into VOO.

For more on this must-have ETF, check out this blog post:

Best Investment Decision

Vanguard Canada eh?

The Vanguard FTSE Canada All Cap Index ETF (VCN TSE) is plain vanilla, mirroring the S&P/TSX Composite Index.

Its management fee is a meagre five basis points – sharing bragging rights with two other companies for having the cheapest fund in this category.

According to Atul Tiwari, managing director of Vanguard Investments Canada, there is room to bring that fee down even more.

Vanguard, like Blackrock, is a huge player globally with considerable heft.

As such, the company has scale, structural advantage, and the ability to spread costs over a larger asset basis, compared with some of its competitors – this according to Mr. Tiwari.

Accordingly, Vanguard may be better positioned to carve off a basis point in fees here and there.

For investors, a difference of one or two basis points is consequential, and Mr. Tiwari touts Vanguard as being among the cheapest providers in the field.

“Why pay more, when you can pay less?” he adds.

Vanguard is relatively new to the Canadian ETF market, becoming a player in that market in December, 2011.

The amount it has under management represents a fairly big slice of the overall Canadian ETF market, given Vanguard hasn’t been around that long in Canada.

A major reason for Vanguard’s early success in Canada has most likely been its emphasis on the low fees of its products.

(Info via Niall McGee, as reported in The Globe and Mail, 9 Oct. 14)

Given the fact that the Canadian flavour of Vanguard’s offering in the U.S. is piggybacking on its success in that market, and the fact that there is a commitment to having a rock-bottom management fee, means that Vanguard is probably here to stay.

Vanguard will undoubtedly compete very aggressively with the other firms in the ETF space.

I for one am a big fan of Vanguard, and already own VOO Vanguard S&P 500 ETF NYSE.

I will be buying more on the dips, and holding for the long haul.

You can find out more about this best-of-ETFs, check out this blog post:

Best of ETFs

According to Ronald S. Baron, the founder of Baron Capital, the economy and the stock market double every twelve years.

All the more reason to invest in Vanguard’s offering, as it mirrors the S&P/TSX Composite Index, just like the U.S. offering mirrors the S&P 500 index.

(Info via Niall McGee, as reported in The Globe and Mail, 9 Oct 14)

Ronald S. Baron

Ronald Stephen Baron is an American mutual fund manager and investor. 

He is the founder of Baron Capital, an investment management firm. 

Born in 1943, he is worth US$-2.2 billion (2017). 

He was broke in 1970.

In 2007, he paid $103 million for a house in East Hampton, New York – the most ever paid for a residential property at that time.

His thoughts, as voiced on CNBC, June 13/17:

He likes Schwab.

He likes Under Armour, because of the entrepreneur’s commitment.

He says Tesla will be US$1,000 in 2020. 

He has visited its HQ, unlike other fund managers.

Tencent Holdings Limited is a Chinese investment holding company whose subsidiaries provide media, entertainment, payment systems, internet and mobile phone value-added services, and operate online advertising services in China. 

It is investing in Tesla.

He is optimistic about the outlook for the stock market because of low interest rates, low price of oil, etc. 

He says stock prices are cheaper than they should be.

According to him, the stock market and the economy are intertwined.

Every twelve years, the economy and stock market double. 

Therefore, invest in an index fund.

He agrees with indexing but, for his own firm, he is okay with mutual funds, because of the quality of people he has managed to surround himself with.

Dead Wgt. Exceeds Winners

As reported by Jeff Sommer in the Sunday New York Times business section under the heading ‘The Best Investment Since 1926,’ “Apple has generated more profit for investors than any other American company.”

At this time last year, over that roughly 90-year period, the leader was Exxon Mobil Corp.

It should be noted that the oil giant has been publicly traded almost three times as long as Apple, Inc. Inc.’s annualized returns were the highest, coming in at 37.4 per cent, but it hasn’t been around long enough to create as much investor wealth; it ranked 14th on the list, which was created by Hendrik Bessembinder, finance professor at the W.P. Carey School of Business at Arizona State University.

Other notable companies carried on the list included Facebook Inc., Visa Inc., Alphabet Inc. (Google), Microsoft Corp. and Berkshire Hathaway Inc.

Mr. Sommer’s column also revealed some shocking insights:

A mere four percent of all publicly traded stocks account for all of the net wealth earned by investors in the stock market since 1926.

Only 30 stocks account for 30 per cent of the net wealth created by stocks in that long run, while 50 stocks account for 40 per cent of the net wealth.

Ponder that for a minute… only one in 25 companies are responsible for all stock-market gains.

The other 96 per cent are, for the most part, giant boat anchors.

This all begs the question since time immemorial, “How can investors unearth the top-performing stocks such as Apple, Amazon and Exxon Mobil?”

A follow-on question is, “And, should they even try?”

There are two types of investment strategy, where an investor can get at these winners, all of which fall into one of two broad categories: inclusivity and exclusivity.

The exclusive approach is to diligently screen and research every company that is publicly traded to home in on those few outliers.

Exclude everything else, and own what you hope are the best-of-breed stocks.

The inclusive approach is quite the opposite:  Buy almost every stock, thus ensuring that you will hold the big kahunas, as well as lots of so-so performers, and plenty of downright losers.

This keeps your costs down, and time works in your favour over time.

As time marches on, winners push the losers aside, as they accumulate market capitalization-weighted size.

Each approach has its merits and disadvantages.

Their merits have been fuelling the debate over active versus passive investing and alpha versus beta.

Other approaches to inclusive/exclusive screening include factor investing and smart beta.

There are challenges, of course.

With the exclusive approach, a number of low probability events have to break your way.

You must come up with a way of identifying those unique companies that will generate outsized returns over time.

At the same time, you need to avoid the various value traps and other false starts.

Historically, these pitfalls have worked wonders at separating investors from their money.

Once you actually discover these rare companies, you have to keep them as a portfolio investment.

This presents its challenges.

These gems tend to experience regular, gut-wrenching price slumps; the big winners mentioned above have all weathered retreats of 50, 60, and even 90 per cent on their way to becoming the biggest winners.

Most investors lack the discipline and fortitude to hang tough during these severe price fluctuations.

Once you acquiesce to those two challenges, you then must decide when to jettison the winners, since nothing goes on forever.

As Mr. Sommer points out, General Motors was a star from 1926 on – that is, until it went under in June, 2009, and basically wiped out equity investors.

AT&T Inc., meanwhile, was split into many smaller parts, some of which have gone on to do well (Verizon Communications Inc.), while others not so much (Lucent).

Finding the best-of-the best companies to own is a difficult undertaking, to say the least.

The inclusive approach is not without its challenges.

Indexing is boring.

It’s like watching paint dry, and it gives you nothing to talk about at cocktail parties.

It is considered a lazy man’s (woman’s) way of investing, even antithetical to capitalism and un-American – or worse.

But, it does have undisputedly two advantages for those seeking the market’s biggest stars:  

First, it’s much less expensive than active investing and, second, it is guaranteed to work.

What’s not to like about that?

Keep that in mind the next time you stare wistfully at Amazon’s stock price.

(Info via Barry Ritholtz, as reported in The Globe and Mail, 27 Sep 2017)

Please refer back to my Stock Market Top Stocks blog post, in which I reveal my favourite indexing ETF and the book you should read that covers it.

Index Funds & ETFs Redux

These are the funds that allow small investors to build diversified, tax-efficient portfolios at rock-bottom cost.

They’ve freed investors from the corrosive costs of traditional funds, and enabled investors to invest on their own, without having to do the arduous work of researching companies, and buying individual stocks.

For decades, index funds have represented a triumph for ordinary investors over highly paid active fund managers.

Most people fail miserably at picking stocks.

Indexing has allowed them to create a well-diversified, ultralow-cost portfolio of ETFs, and they are well on their path to becoming successful investors.

Over the past decade or so, average investors have been afforded the unprecedented opportunity of building low-cost, broadly diversified portfolios that weren’t available before.

It wasn’t that long ago that building a portfolio entailed having to pick individual stocks, or having to pay a broker to do it for you, and people of modest means were not able to do this effectively.

Mutual funds made diversification possible for anyone with as little as a few hundred dollars, and index funds have driven the cost of investing lower than it has ever been.

Index funds facilitate saving 90 percent on investing costs over a lifetime.

Now, that’s a good thing.

(Info via Dan Bortolotti, as reported in The Globe and Mail, 7 Oct 2017)

The Exclusive Approach

If you choose the exclusive approach outlined above, then please pay attention to what Warren Buffett has to say about picking stocks.

Arguably the most famous investor of all time, he didn’t get to be where he is by acting hastily or impulsively.

He has built a long and successful career by digging deep before jumping.

He still prefers stocks over bonds.

So, what exactly does he look for?

The approach he reportedly used to build his fortune is based on the book Buffettology, co-written by Mary Buffett.

It outlines the conservative, stringent criteria he uses to evaluate businesses, and buy them and/or their stocks.

His strategy encompasses both qualitative and quantitative tests in an effort to flesh out fundamentally sound companies.

Qualitatively-speaking, he likes to invest in companies that have:

  1. An ‘enduring moat’ – something that a competitor doesn’t have (“household” name brand-name recognition, or the distinction of being a low-cost producer of a good or service);
  2. Durable competitive advantage – the quality of goods and services it provides, which enables them to adapt prices to inflation, and therefore weather any shifts in the broader economic climate;
  3. Straightforward business – Mr. Buffett likes businesses that have products that are simple for an investor to understand. He espouses companies that make everyday products everyone needs, and this has grown to include tech stocks to a degree;
  4. Strong management.

Quantitatively-speaking, he and his generals at Berkshire Hathaway employ the following tests:

  1. Earnings predictability – Mr. Buffett likes companies with a long history of earnings growth;
  2. High return on equity and return on total capital;
  3. Reasonable use of debt and strong free cash flow generation – Mr. Buffett targets businesses with reasonable debt levels. One way he assesses management’s view on the use of leverage and risk looks at how much debt a firm has, resulting from decisions made by management.  He prefers businesses that don’t have major capital expenditures on equipment, plants, or R&D.  A company has the potential to reinvest opportunistically by generating positive cash flow – right up Mr. Buffett’s alley.
  4. Management’s use of retained earnings – Another way Mr. Buffett examines a firm’s management is by looking at a company’s return on retained earnings – those earnings it keeps rather than paying out in the form of dividends. He measures how much a stock’s earnings per share have increased in the past decade, and divides it by the total amount of retained earnings over that time.  This approach reflects how much profit the company has generated using the money it has reinvested in itself, and how well management has increased shareholder value.

(Info via John Reese, as reported in The Globe and Mail, 27 Sep 2017)

ETFS: The Way to Go

An ETF will enable you to achieve instant diversification, which you can’t achieve with just a handful of stocks.

The advantage of owning ETFs is that it eliminates (or at least minimizes) the inherent risk in having the odd stock in your small portfolio go against you badly.

And, if you are a busy person, like most of us are, and have zero time to dedicate to reading up on company news releases or the financial news in general, ETFs might just do the trick for you.

(Info via John Heinzl, as reported in The Globe and Mail, 23 Sep 2017)

ETF Liquidity

Even an ETF that doesn’t trade can be liquid.

In fact, most of ETF liquidity comes early in the life cycle from market trading in the underlying securities.

As an ETF comes into its own, and the ETF assets under management builds, more and more natural secondary trading takes place, with less dependence on the primary market and the underlying securities.

ETF liquidity is much greater than thought.

In reality, an ETF’s fundamental liquidity is really that of its underlying market.

An ETF’s average daily volume does not account for the full extent of of its liquidity.

In fact, liquidity can be sourced in the secondary market by using execution strategies, such as limit orders.

Designated brokers can create new shares of an ETF by accessing the underlying bond market.

(Info via Alan Green, head of iShares Global Markets for BlackRock Canada, as reported by Clare O’Hara in The Globe and Mail, 27 Sep 2017)

Don’t click away too soon. 

There’s more to come in this comprehensive Investment Strategies:  Types of Investment blog post that you don’t want to miss.

Investing Words of Wisdom

Invest in companies that are clear leaders in emerging or important fields, and that are run by excellent managers, who inspire disruption or innovation.

Invest in a company that has the potential for delivering a lot of pleasant surprises.

Think Apple, which launched, and massively succeeded with iCloud services, such as Apple Music.

It totally disrupted the cell phone market with the iPhone, and it continues to innovate in that space that it now dominates.

For more on Apple, head on over to this blog post:


For the record, I own the stock.   

Who would have thunk that Tesla would rapidly build a global fast-charging network for electric cars, build the world’s biggest battery factory, launch into the commercial and residential energy-storage business, and assume the leadership position for self-driving cars?

And then there’s Facebook with its advertising platform.

It keeps improving its advertising toolbox to the point where it is arguably a better ad platform than Google’s.

Facebook Groups and Facebook Messenger have grown to the extent of increasing business and consumer stickiness within the Facebook environment.

Add to the mix Netflix with its incredible global expansion opportunity.

The stock is up more than 2,000 percent in the past five years.

The company has become a powerhouse of original content.

It seems like a no-brainer for every household that has a broadband Internet connection, even if the intention is to keep the existing paid TV connection.

(Info via Chris Umiastowski, as reported in The Globe and Mail, 23 Sep 2017)

Suggestion by Benjamin Graham, the father of value investing, in his book The Intelligent Investor:

Hold between 25 percent and 75 percent of a portfolio in stocks, with the remainder in safer assets, such as bonds.

A stock in the glow:  Bank of America (BAC Bank of America Corp. NYSE).

Over the past five years, the stock has jumped 241 percent.

The stock is no longer cheap, but it still represents reasonable value.

It trades near book value, and is at 15 times earnings.

(Info via Norman Rothery, as reported in The Globe and Mail 23 Sep 2017)

Disruptive Tech Stocks

Companies exploiting a disruptive technology include Amazon, Electrovaya (a micro-cap developer of Lithium Ion battery technology), Netflix, Shopify (a retail-payment intermediary), and Tesla. 

Electrovaya hopes to benefit from the trend towards clean electric transportation.

How should an investor set about valuing such a stock?

These companies undoubtedly have no reportable earnings per share, negating a price-to-earnings ratio analysis – nor operating earnings, however defined.

The best metric for valuing an explosive growth company, such as those above, is quite conceivably the price-to-sales ratio (PSR).

This is calculated either on a per-share basis (stock price divided by sales per share) or on a total-company basis (market capitalization divided by revenue).

The resulting number will more than likely be large, perhaps even in the double digits.

The question then becomes, when is the PSR so high that even a hyper-growth company cannot live up to the expectations built into the stock price?

Over 30 years ago, investment legend Kenneth Fisher highlighted the use of the PSR ratio in his 1984 book Super Stocks

His number one rule:  Stay away from stocks where the PSR is greater than 1.5, and never buy a stock with a PSR greater than three.

A stock selling at such a high PSR can increase rapidly, but totally based on ‘hype.’

More recently, James O’Shaughnessy appraised the PSR in his 2012 edition of What Works on Wall Street.

In the original edition of this book, he posited that the single best value identifier was a stock’s price-to-sales ratio (PSR).

The more recent edition maintains that the low PSR continues to live up to its dictate, but adds that it has been supplanted by the enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization).

His opening comment on PSR is alarming:  “High-PSR stocks are toxic.”

He goes on to claim that stocks with a PSR in the top decile (10 percent) routinely underperform the market, regardless of the market environment – the only exception appearing to be during extremely speculative markets, like the tech bubble in 1999.

To put all of this into its proper context, here are the PSRs for the companies mentioned at the outset of this piece, based on the market cap and the trailing four quarters of revenues, as at 26 Aug 2017:

Amazon:  3.1
Netflix:  7.2
Tesla:  5.7
Shopify:  15.5
Electrovaya:  7.0

You be the judge as to whether or not those ratios are toxic.

Read on to find out what trouble Shopify has gotten itself into.

(Info via Robert Tattersall, CFA, as reported in The Globe and Mail, 26 Aug 2017)

Who could have guessed?

The Shopify stock (NYSE: SHOP) tumbled 11.6% 4 Oct 2017, upon the release of a report by short-seller Citron Research that depicted the e-commerce platform as a ‘get-rich-quick’ scheme that contravenes Federal Trade Commission (FTC) regulations.


Citron’s founder Andrew Left equated Shopify and its affiliate program to Herbalife, which last year was ordered to settle to the tune of US$200-million by the Federal Trade Commission for misrepresenting the earnings potential of its own distributors.

Left wants the FTC to look into Shopify’s claims that its merchants can become millionaires, and quit their jobs.

He also accused Shopify of paying its over 13,000 ‘partners,’ without enforcing or requiring appropriate disclosures of that compensation.

These are people who promote the platform, and refer merchants to Shopify.

Left also posited that Shopify shares shouldn’t have such a lofty valuation of trading at nearly 17 times sales (just prior to the report).

Rather, he claims that the stock should be valued closer to 8.5 times sales, as is the case with other leading SaaS companies, like Square or Wix.

He suggested that the stock should be valued 45 percent lower than it was 3 Oct 2017.

(Info via The Motley Fool, Steve Symington, 4 Oct 2017)

Maybe, just maybe, Shopify’s price-to-sales ratio (PSR) is toxic after all?

Stocks That Glow

Microsoft (Nasdaq: MSFT)

This company is in the midst of a successful transition to the cloud.

Payments for data storage and cloud-based software are steady, so revenues are becoming more predictable.

There’s lots of growth to come, given that cloud adoption is still in its early stages.

Facebook (Nasdaq: FB)

It had about 700 million users, when it went public.

Now, it’s up to 1.2 billion.

It’s generating big revenues, and it’s getting a lot more from Instagram now.

(Info via Bryan Borzykowski, as reported in The Globe and Mail, Report on Business, Oct 2017)

I covered Facebook in this blog post:


For the record, I own Facebook shares.

Alibaba (NYSE: BABA) 

This company still has more room to grow outside of the main secondary cities in China.

(Info via Christine Tan, as reported in The Globe and Mail, Report on Business, Oct 2017)


Nvidia has been the single best performer in the S&P 500 index since the end of 2015.

It has been dubbed the world’s smartest company by MIT Technology Review.

It has maintained a torrid rate of growth by establishing itself in AI-related businesses.

There is plenty of room for growth here.

The company designs graphics processing units (GPUs) for the gaming and professional markets, as well as system-on-a-chip units (SoCs) for the automotive and mobile computing markets.

Its primary GPU product line, labelled ‘GeForce,’ competes directly with Advanced Micro Devices’ (AMD) ‘Radeon’ products.

Lam Research Corp. (LRCX: Nasdaq)

Cell phones and personal computers have become central to our daily lives. 

Accordingly, the need for semiconductors has been growing.

These little devices provide the power for most of the electronics in use today.

The company is a leading manufacturer of specialized equipment for the semiconductor chipmakers.

Lam’s products enable chipmakers to build device features that are more than 1,000 times smaller than a grain of sand.

And, its major innovations have resulted in big profits and higher share prices.

Shares have risen nearly 150 percent over the past two years, and they just recorded new all-time highs.

This big trend is not showing signs of weariness anytime soon.

Keep an eye out for semiconductor stocks, as there is more upside potential.

(Info via Steve Sjuggerud’s DAILYWEALTH, 19 Sep 2017)

Premium Brands Holdings Corp. (TSE: PBH)

This is a B.C.-based company that makes processed meats and packaged sandwiches.

It has advanced 344 percent over the past three years.

Waste Connections Inc. (NYSE: WCN)

This company has a strong record of acquisitions.

(Info for PBH and WCN via Kristine Owram, as reported in The Globe and Mail, Report on Business, 30 Sep 2017)

Apple (Nasdaq: AAPL)

Bernstein’s Toni Sacconaghi, the number one analyst for this stock, recommends it, and sees it going to US$175 for an upside potential of +13 percent.

Mr. Sacconaghi has been the number one tech hardware analyst for sixteen straight years.

He also recommends HPE (Hewlett Packard Enterprise Co. NYSE), which he sees going to $18.

For the record, I own Apple stock.

High-Dividend U.S. Stocks

As they search for high-yielding and stable instruments, investors typically prize high-dividend players in a low-rate, low-growth environment.

Telecom and utilities stocks have some of the highest dividend yields in the S&P 500.

Top of the index is Telecom Century Link, with a dividend yield of 11.4 percent.

Both utilities First Energy and Southern Co. have dividend yields above 4.5 percent.

When yields on corporate bonds are lower than dividends on stocks, that can be a cause for concern.

Consistently low bond yields can be an issue for equity players, in that they end up taking on bigger risks, as they seek out higher returns.

They also raise red flags about the overall health of the economy.

The telecom sector carries a dividend yield of 5.2 percent, while the utilities sector comes in at a yield of 3.4 percent – this compared with a 2.4 percent yield for the broad S&P 500 index.

According to analyst Craig Moffett at Moffett Nathansan, valuations for AT&T and Verizon Communications are “enticingly low,” with dividend yields “particularly attractive relative to the 10-year Treasuries.”

For those investors concerned about overly stretched valuations and a market that may be primed for a pull-back, the high-dividend payers may be a safer play.

(Info via Chuck Mikolajczak, as reported in The Globe and Mail, 11 Sep 2017)

Is value investing dead?

Die-hard value investors have been suffering for the past few years at the hands of growth stock investors.

Columbia University professor Kent Daniel recently conducted an analysis of stock prices in relation to their book value.

He discovered that the average large-cap value stock’s price-to-book ratio is half that of the average of large-cap growth stocks.

The differential is even greater for small-cap stocks.

And, he found that the difference is wider than the average over time.

According to a recent MarketWatch column, since 1959, the average value stock’s price-to-book ratio has been only a third less than that of the average growth stock.

The only other time that value was cheaper than now was the late 1990s Internet stock bubble.

Some people are critical of the price-to-book measurement, because companies are usually evaluated by the amount of profit they generate – not the value of the assets they own.

But, Benjamin Graham used it as one of his stock evaluation criteria, figuring that a stock selling at or below its book value must be a bargain.

Joseph Piotroski, a professor of accounting at Stanford, would flip that metric on its head, and look at the book value in relation to the share price, zeroing in on stocks that ended up in the top 20 per cent.

John Neff, the former Vanguard Windsor Fund manager, who amassed a massive 30-year track record of market outperformance, used low P/Es to look for undervalued stocks.

Price-to-earnings ratio is a measure of how much investors are willing to pay for returns.

A low P/E is synonymous with very low expectations.

Mr. Neff would typically look for stocks with P/Es that were about half what the market average was at any given point in time.

Within that group, he’d look for companies with steady, but not outrageous, growth in earnings per share and solid dividends.

Dividends were important to him because, even if a stock remained cheap, the investor was benefiting from a higher-than-average yield.

Then, he would look at total return, which he calculated to be EPS growth, plus the dividend yield, divided by the P/E ratio.

Mr. Neff used his not-so-common criteria to further narrow down the list of stocks to those that had a figure that was double the industry or market average.

He was obviously going against the grain.

Investors hoping, praying, and wishing for value’s turn may do well to look at highly discounted stocks.

(Info via John Reese, as reported in The Globe and Mail, 10 Oct 2017)

This Investment Strategies:  Types of Investment blog post is not over yet, so hang in there my friend. 

More exciting stuff yet to come.

Correction vs Bear Market

What separates them is not magnitude as much as duration. 

The time you spend in the contraction, and the time it takes to recoup the lost capital.

What happened in the fall of 1987 was a steep correction, not a bear market.

Bear markets only occur when there is an outright contraction in economic activity.

Expansions and bull markets don’t ever just die of old age.

They usually come to an end at the hands of the Fed.

We are 90 percent done in terms of the economic cycle in the U.S. and Canada, which translates to 2018 being the last year of expansion, in all likelihood.

What this means, of course, is the need to maintain a focus on balance sheet strength, liquidity, quality, reducing the cyclicality of the portfolio, and having exposure to companies that have no correlation to GDP, and have high earnings visibility and low earnings volatility.

Alternatively, one could move funds to parts of the world that are more mid-cycle, with friendlier central banks, a longer runway for growth, and superior valuation metrics – on both sides of the ocean.

Keep in mind that Canada is three percent of the world market cap, the U.S. another 33 percent, so there is nearly 65 percent of the world’s equity-market cap, or roughly $50-trillion, well worth considering right now across both oceans.

(Info via David Rosenberg, as reported in The Globe and Mail, 23 Sep 2017)

A bull market ceases to be one when it declines by 20 percent.

Corrections and crashes have historically been followed by very powerful rallies.

Steal a page from Rudyard Kipling’s poem, “If… and try to keep your head, when all about you are losing theirs.”

If you think this way, these events will not bother you.

They should be viewed as buying opportunities.

(Info via Joel Schlesinger, as reported in The Globe and Mail, 13 Sep 2017)

The Loonie Effect

Companies with substantial revenues flowing from the U.S. get hurt by a stronger Canadian dollar, since revenues end up being worth less.

On the other hand, companies with substantial costs priced in U.S. dollars see these costs decline, which is a good thing.

Canadian airlines stand to benefit from a higher Canadian dollar, given that fuel, leases, and some maintenance costs are priced in U.S. dollars.

Strength in the Canadian dollar should produce nice shareholder gains for those companies with U.S.-dollar costs and Canadian-based revenues.

At the same time, a strengthening loonie could also contribute to disinflation, just when the central bank needs a bit more inflation.

(Info via David Berman, as reported in The Globe and Mail, 23 Sep 2017)

If the loonie continues to strengthen, the value of U.S. assets will fall in Canadian dollars.

The Energy Effect

Canadian equities are steeped in resources.

They are more closely aligned to global, rather than local economic conditions.

The energy sector accounts for a fifth of the market capitalization of the S&P/TSX composite index.

Obviously, the direction of global oil prices affects this sector in Canada, given that Canada is a net exporter of oil.

(Info via Tim Shufelt, as reported in The Globe and Mail, 7 Sep 2017)

The Telecom Effect

Telecom stocks represent a bright spot in the Canadian landscape.

The media sector is the second most sensitive to economic growth.

Quebecor, Inc. (QBR/B.TO TSE) benefits from the surge in advertising and market spending that accompany a strengthening economy.

Cogeco Cable, Inc. (CCA.TO TSE) is closely aligned with telecommunications companies.

The media and telecom industries are a good place to look, if one is hoping to benefit from accelerating growth.

(Info via Scott Barlow, as reported in The Globe and Mail, 13 Sep 2017)

The Greenback Effect

The U.S. dollar is usually a safe haven for investors during times of economic turmoil.


The price of gold goes up, when the U.S. dollar is falling.

That’s because gold is priced in U.S. dollars.

So, if the U.S. dollar weakens, more dollars are required to buy the same ounce of gold.

Since the early 1970s, gold’s compound annual return has been about 6.9 percent a year.

However, when the U.S. dollar experiences weakness, gold goes up at 12.2 percent a year.

And, when the dollar strengthens, gold only goes up 1.8 percent a year.

(Info via Steve Sjuggerud’s DAILYWEALTH, 19 Sep 2017)

Major Currencies

Major currencies tend to move glacially.

They have long-term moves higher or lower that are like watching paint dry – not drastic crashes or spikes.

Here, we are talking about the Aussie, Canadian dollar, the euro, the pound, the swissy, and the U.S. Dollar.

Rising Interest Rates

Rising rates can put pressure on dividend stock valuations, and can also increase costs for pipelines, utilities, and other companies that borrow money.

So, instead of acting as a tailwind, rising interest rates become a headwind.

Rising Bond Yields

If yields go up too quickly, or more than expected, that could result in a compression in earnings multiples, like enterprise value-to-EBITDA or price-to-earnings.

One way around that is to look for companies that are going to grow their earnings, regardless of the interest rate cycle.

If rates rise, and valuations compress, these companies will still outgrow the market, and be more resilient.

(Info via Bryan Borzykowski, as reported in The Globe and Mail, Report on Business, Oct 2017)

Seasonal Swings

September and October are seasonably weak months for stocks (and seasonably strong months for government bonds).

Since 1950, the S&P 500, the world’s most cited benchmark, has lost ground, on average, during the month of September.

However, this past September was the least volatile ever, which is a good proxy for the balance of the year.

It was the first positive September since 2013.

Usually, we might expect weak stock markets in emerging markets, Europe, and the U.S. in September and October, and possibly the rest of the year – to a lesser extent in Canada, given the Canadian market tends to move in sympathy with the U.S. most of the time.

But, this time really is different.

There is the old adage, ‘sell in May and go away’ – referring to the historical underperformance of stocks from May to October, versus November to April.

But, that doesn’t hold true every year.

This saying of selling in May and going away may be driven by the conflict of interest of professional portfolio managers, who face the dilemma of managing other people’s money.

And, of course, there is the element of human psychology.

Their agendas, and their efforts to maximize their own benefits, move them to rebalance their portfolios predictably throughout the year.

Systematic shifts in the portfolio holdings of these managers result in the high returns on risky securities around the start of the year.

They rebalance their portfolios to effect performance-based remuneration (translation:  their Christmas bonus).

Institutional investors are net buyers of risky securities around the New Year, when they are disposed to including lesser-known, high-risk securities in their portfolios, in an effort to outperform benchmarks.

Later in the year, these managers lock in returns by divesting from lesser-known risky stocks, and replacing them with less-risky and well-known stocks, or risk-free securities, such as government bonds.

Their behaviour has the predictable effect on prices and security returns.

Early in the year, they put a bid on high-risk bonds and risky stocks, and then they put a sell on them later in the year.

Government bonds and low-risk stocks behave differently – down early in the year and up later in the year.

Those investors engage in arbitraging, given they are not bound by the conflicts or restrictions the mangers face.

The pressure on government bond and stock prices spreads over a few months, resulting in stock market relative strength November to April and relative weakness May to October – the opposite effect for government bonds.

The seasonal pattern is amplified by these managers falling into the herd mentality trap.

They feel safe when their portfolios bear the same resemblance to those of other managers, who invest with the same mandate.

No jobs are lost due to average performance, or holding the same securities as the rest of the herd.

This rings true, given these managers survive based on short-term performance metrics.

Herding is especially strong in emerging markets, growth stocks, and smaller stocks.

Looking at where these managers are this year, as at 5 Sep 2017, they have done quite well in emerging markets, Europe, and the U.S.

They may be inclined to take the safe approach.

They may be wondering why they would take on the risk of staying in the market, what with the financial and geopolitical uncertainties and the policy conundrum in the U.S.

The safest option for the herd would be to remain in cash, or rebalance toward government bonds, waiting out the market by locking in their positive results, not to mention their Christmas bonus.

This could very well be the scenario that plays out during the September-to-October timeframe and perhaps even for the rest of the year, affecting the stock markets in the process.    

(Info via George Athanassakos, as reported in The Globe and Mail, 5 Sep 2017)

The Canadian Market

Oh where oh where is the Canadian market going?

One of my favourite strategists, Brian Belski, chief investment strategist at BMO Nesbitt Burns, says that BMO’s research shows that, in years when the Canadian dollar has appreciated in the first six months of the year, the TSX has rallied over the next six months.

He believes that “there is excess pessimism built into Canadian equities, and a rebound in TSX performance is overdue.”

Matt Barasch, Canadian equity strategist at RBC Dominion Securities, says that the Canadian companies that would benefit the most from a reduction in U.S. corporate tax rates would include banks, life insurance companies, railways, and select consumer-discretionaries with big footprints in the U.S.

He adds that oil and gas producers would benefit indirectly from U.S. economic growth.

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, calls for Canadian equities to outperform, and is more bullish on Canada than the U.S.

Further, he sees West Texas intermediate crude prices rising to at least the mid-50s (U.S.), which would goose energy stocks.

He also likes the banks.

(Info via David Berman, as reported in The Globe and Mail, 3 Oct 2017)

The banking system in Canada remains fairly strong, and most of the Canadian market, including the banks and insurance companies, should benefit from higher interest rates.

The price of crude oil may increase, which would be a positive for Canada, in that it is a net exporter of oil.

Ditto for copper.

Global growth is a driver of copper.

Lumber could also be a beneficiary.

(Info via Brenda Bouw, as reported in The Globe and Mail, 3 Oct 2017)

Emerging Markets

Interest rates from central banks may increase gradually, which could be a negative for emerging markets, but growth may ‘trump’ that concern.

(Info via Brenda Bouw, as reported in The Globe and Mail, 3 Oct 2017)

The Fourth Quarter

There are many theories as to why the fourth quarter is so often the best one for equity bulls.

  1. Fund managers play catch-up;
  2. Holiday spending kicks into high gear;
  3. Investors celebrate the January effect in December;
  4. Etc.

According to Bebeto Matthews/Associated Press, the current quarter has generally been an upbeat one for the S&P 500 since the financial crisis; that index has gone up 6.2 per cent on average in the fourth quarter since 2009.

The S&P 500 index has risen seven times in the past eight years between October and December.

A volatility-free September just trashed the calendar effects.

Fighting against momentum constitutes a losing trade, until proven otherwise.

Equities have seen an eighth-straight quarter of gains – the longest winning streak since the start of 2015.

The S&P 500 rose four per cent, as…

  1. Corporate earnings posted the first back-to-back double-digit advance in six years, helping stocks weather mounting tension with North Korea;
  2. A deadly U.S. hurricane season;
  3. Escalating political turmoil.

Returns have started to widen their reach, as money shifted from nosebleed tech behemoths to laggards, such as small-cap and value shares.

The rotation, spurred by higher bond yields, ramped up the last week of September, when U.S. President Donald Trump and Republican congressional leaders put forward a framework to overhaul the U.S. tax code.

All four major U.S. equity gauges ended September with year-to-date gains of at least 9 per cent:

  1. The Dow Jones Industrial Average;
  2. The Nasdaq Composite Index;
  3. The Russell 2000 Index;
  4. The S&P 500.

The last time that happened was in 2013, when the S&P 500 rallied an additional 9.9 per cent.

Placing bets for a sloppy close to any year has been a losing wager since the global financial crisis ended.

Since 2009, the S&P 500 went up on average 6.2 percent in the fourth quarter.

Matching that return would boost the index to 2,676 by December from the close of 2,519.36, 29 Sep 2017.

According to Stifel Nicolaus & Co. chief equity strategist Barry Bannister, “Seasonality is a starting consideration, but never an end unto itself.”

Citing catalysts, including Mr. Trump’s fiscal plans and stronger global growth, he raised his year-end S&P 500 target 100 points to 2,600.

Not everyone is so bullish.

Ten out of 18 Wall Street strategists surveyed by Bloomberg see the S&P 500 at 2,500 or below by year’s-end.

David Kostin at Goldman Sachs Group Inc. reaffirmed his call for 2,400, claiming that the commencement of the Fed’s balance sheet reduction will result in higher bond yields, and weigh on equities.

Others foresee the rotation into banks and small-caps as going against the bear case for stocks.

Jason Hunter, an analyst and JPMorgan Chase & Co., watches charts to predict markets.

He had concluded that the summer swoon in tech stocks would lead to a market correction.

However, the breakout of the Russell 2000 doesn’t confirm that note of caution.

He’s looking to see if the new leadership groups can motor on through resistant levels.

The latest rally has renewed interest in a buy signal from a century-old charting technique.

The Dow Jones transportation average rose to all-time highs, after rising eight days in a row, thereby facilitating the group’s catch-up to the rally in the industrial measure – this after the two had diverged from each other during the past two months.

That brings a sigh of relief to proponents of the Dow Theory.

That theory is an investment idea that springs from observations made by Charles Dow a century ago.

It posits that moves in transportation stocks must be ‘confirmed’ by industrials, and vice versa, to be a sustainable rally.

So, where to from here?

Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, maintains that consumer discretionary and technology stocks are the two sectors that tend to benefit from seasonal tailwinds due to holiday spending.

Chris Harvey, a strategist at Wells Fargo, recommends investors lean towards the recent Trump trade, such as small-caps.

He wrote in a note, “We’re placing more faith in a rotation, rather than an upward market ‘pop.”

(Info via Lu Wang, as reported in The Globe and Mail, 3 Oct 2017)


Of the 500 S&P 500 stocks, 128 are down from their highs, as at this writing.

That makes an argument for indexing, or at least a portfolio investment in all asset classes.

For more information on indexing, please read this blog post:


A dozen or so securities in a portfolio doesn’t make for proper diversification.

It is commonly held that, even though bonds are likely to deliver lower returns than stocks, they do provide protection for one’s portfolio, when equity markets develop a bad case of heartburn.

That’s usually the case, but not always.

Higher interest rates affect more than just bond prices.

When a country drives up its rates, it tends to attract more foreign investors.

That in turn drives up the demand for its currency.

But, a higher Canadian dollar can negatively affect investments.

The stronger loonie and higher interest rates have impacted Canada’s oil producers and the Canadian stock market, given the energy sector makes up about 20 percent of the Canadian stock market.

Consider the USD/CAD consequence… the S&P 500 index of large U.S. stocks is up about three percent since May 1 in U.S. dollars, as at this writing.

But, a Canadian holding an S&P 500 index fund would have seen that investment fall by more than five percent over the same period of time, as the U.S. dollar tumbled in value against the loonie.

The soaring loonie has dragged international stock investments down for Canadians.

But, not to worry.

A few months of mildly disappointing returns does not translate into panic city.

A well-disciplined investment strategy should be maintained at all times.

One can always mitigate investment risk by moving into short-term bonds (which are less sensitive to interest rate moves) and/or using currency-hedged equity funds (which reduce the impact of a rising loonie on international and U.S. stocks).

Such tactical moves require that you be a nimble investor/trader, and get the timing right.

But, few can do that.

Unless you have a crystal ball, broad diversification is the way to go, and a focus on long-term investing is a must.

That can be achieved with an index ETF/fund.

Please check out this blog post for more details:


A portfolio investment should contain a healthy dose of foreign equities.

(Info via Dan Bortolotti, as reported in The Globe and Mail, 5 Sep 2017)

We’re almost at the end of this Investment Strategies:  Types of Investment blog post, so hang in there.

Did you know?

Rising interest rates send bond prices down.

Since bond yields rise, when prices fall, bonds become more attractive to investors looking for a heftier payout.

Dividend sectors have historically weakened, as bond yields climbed, and investors shifted assets from dividend stocks to bonds to reduce portfolio risk.

Inflation ultimately drives mortgage rates.

If your mortgage rate is less than 2.8 percent, it generally means you are paying more principal than interest.

High-yield, junk-related bonds typically respond more violently than other assets to market shocks, because investors tend to cut their riskier bets first.

MSCI’s all-country world stock index (ACWI iShares MSCI ACWI ETF Nasdaq) tracks more than 2,400 stocks in 47 countries.

The U.S. dollar index tracks the greenback against a basket of six major currencies.

Tesla:  China is studying when to ban production and sale of cars using traditional fuels.

A weaker dollar and low interest rates will give enormous boost to the U.S. economy.

Historically, it takes 12-18 months for the full impact of a rate hike to be felt in the economy.

Smart-beta ETFs are passive ETFs with active methodologies.

According to Daniel Alpert, managing partner of Westwood Capital LLC in New York, “Markets generally, ironically, favour Congresses that don’t do anything.  To a certain extent, they care about issues like the debt ceiling, but then there’s the boy-who-cried-wolf issue where they’ve become inured.  The notion that markets and politics are correlated on a real-time basis is wrong.”

Corrections and crashes have historically been followed by very powerful rallies.

Stock repurchases boost earnings per share by lowering the per-share part of the equation.

A market’s lofty level could limit share repurchases.

A flat yield curve usually means investors are worried about the economy.

The central bank can put pressure on the short end of the curve by moving rates, but the long end is more difficult to influence.

The flattening of the yield curve continues, as borrowing costs increase, impacting the short end of the curve

For the long end to move higher, this requires pressure from abroad.

During each of the Fed’s quantitative-easing cycles, yields rose when the central bank was buying, and then fell when it stopped.

What really matters to the bond market isn’t so much what the Fed is doing, but what the policy changes mean for the U.S. economy in the months and years ahead.

In the past, the yield curve (the gap between the rates on the short- and long-term Treasuries) has narrowed reliably, as the Fed raised rates to cool growth.

Consistent and reliable earnings indicate a lower probability of negative earnings surprises, and may attract institutional investors that prefer lower variations in earnings, in addition to potentially reducing borrowing costs.

In Sum

The genie is out of the bottle… passive, broad index-based investing is the best option for the vast majority of investors over the long term.

For more on this, please check out this blog post:


Inspiration and Quotes

Image of inspirational quote superimposed on a black background.

“Three people can keep a secret, if two are dead.”  Ben Franklin

“Empty barrels make the most noise.”  John F. Kelly’s (four star general) mother

“We are responsible for shaping our own lives, and making our own decisions about outcomes.”  Eleanor Roosevelt

“I can see clearly now, the rain is gone, I can see all obstacles in my way.  Gone are the dark clouds that had me blind.  It’s gonna be a bright (bright), bright (bright) Sun-Shiny day.”  Johnny Nash

“Prediction is very difficult, especially if it’s about the future.”  Nils Bohr

“A diamond is just a piece of charcoal that handled stress very well.”  Anon

“From failed moves come fast moves.”  Anon

“If you get the company right, you’ll get the stock right.”

“In my wildest imagination, I could not have imagined a sweeter life.”  Hugh Hefner

“You gotta know the territory.”  The Musicman

“You gotta know when to hold them, and you gotta know when to fold them.”  Kenny Rogers

“Look for opportunities, not approval.”  Anon

“You can rock the boat, and it won’t tip over.”  Anon

“The market can remain irrational longer than you can remain solvent.”  The economist John Maynard Keynes once famously said.

“In the history of the world, no one has ever washed a rented car.”  Lawrence Summers

“In retrospect, my crash (failure) was one of the best things that ever happened to me, because it gave me the humility I needed to balance my aggressiveness.  I learned a great fear of being wrong that shifted my mind-set from thinking ‘I’m right’ to asking myself ‘How do I know I’m right?’  And, I saw clearly that the best way to answer this question is by finding other independent thinkers who are on the same mission as me, and who see things differently from me.  By engaging them in thoughtful disagreement, I’d be able to understand their reasoning, and have them stress-test mine.”  Ray Dalio went broke, and nearly shut Bridgewater, before turning it into the biggest hedge fund ever.

“If you want to see farther, you have to go higher.”  Steve Nison

“Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.”  John Templeton

“A life is not important, except in the impact it has on other lives.”  Jackie Robinson was an American professional baseball second baseman, who became the first African American to play in Major League Baseball in the modern era.


Convertible preferred stock is preferred stock that comes with an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date.

A convertible security is a security (usually a bond or a preferred stock) that can be converted into a different security – usually shares of the company’s common stock.  Typically, the holder of the convertible determines when and whether to convert.

Cumulative preferred stock is a type of stock that specifies any omitted or skipped dividends that must be paid to its holders, before common shareholders can receive dividends.  And, preferred dividends usually have a set schedule, so that preferred shareholders can know when to expect them.

A convertible, sometimes referred to as a CV, is either a convertible bond or a preferred stock convertible.  A convertible bond is a one that can be converted into the company’s common stock.  You can exercise the convertible bond, and convert the bond into a preset amount of shares in the company.


Through 2014, the S&P 500 had an average annual return of 10.12 percent, the 20-year average being 9.85 percent.  It’s probably not realistic or useful for long-term planning purposes.  In 2011, the 20-year average returned 7.81 percent per year.

Let’s assume that inflation runs at an annual rate of 3 percent, and capital gains come in at 15 percent.  If your target is a 15 percent return before inflation and taxes, you’ll realize a 12.4 percent return.  If your capital gains taxes hit is 20 percent, you’ll end up with an 11.6 percent return.  A really good return on investment for an active investor is 15 percent annually.

A rate of return is the gain or loss on an investment over a specific period of time, expressed as a percentage of the investment’s cost.  Gains on investments are defined as income received, plus any capital gains realized on the sale of the investment.

The type of investment a business enters into along the way determines what is or is not a reasonable rate of return assumption.  As an example, a bank account or certificate of deposit might offer a rate of return of less than one percent.

Total shareholder return (TSR) (or total return for short) measures the performance of different companies’ stocks and shares over time.

It combines dividends paid and share price appreciation to show the shareholder’s total return, expressed as an annualized percentage.

Mean reversion posits that prices and returns eventually move back toward the average or mean. 

This average or mean can be the historical average of the price or return, or another relevant average, such as the growth in the economy or the average return of an industry.

An Inverted yield curve is an interest rate situation, in which long-term debt instruments present a lower yield than short-term debt instruments of the same credit quality.

This type of yield curve is the rarest of the three main curve types, and is viewed as a predictor of economic recession.

Market breadth measures the number of stocks that are rising, and can be a sign of market vitality or weakness.

Volume is another way of looking at market breadth.

Receding volume flows into declining stocks could be troublesome.

(Info via David Berman, as reported in The Globe and Mail, 18 Sep 2017)

Stockholders sometimes use financial derivatives to blunt or hedge their exposure to the shares they own.

One example of a derivative is a put option, which enables the holder to sell a stock at a certain price, within a specified time.

This protects the holder, should the shares go down in price.

(Info via David Milstead, as reported in The Globe and Mail, 2 Sep 2017)

‘Software-as-a-Service’ (SaaS; pronounced /sæs/) is a software delivery and licensing model, whereby software is centrally hosted, and licensed on a subscription basis.

Financial technology (FinTech or fintech) is the new innovation and technology intended to compete with traditional financial methods in the delivery of financial services.

The use of smart phones for mobile banking and investing services is an example of technologies aimed at making financial services more accessible to the general public.

Financial technology companies consist of both established financial and technology companies and start-ups trying to enhance or replace the engagement of financial services.

Fintech is a new financial industry that employs technology to improve financial activities.

FinTech refers to the new applications, business models, processes, or products in the financial services industry, comprising one or more complementary financial services, and made available as an end-to-end process via the Internet.

Money market funds are a hold-over from the heady days of high interest rates. 

They hold short-term debt that companies and governments issue to fund their operations.

Price-to-Earnings (P/E) ratio is the price an investor pays for one dollar of a company’s earnings or profit.

That is, if a company is reporting basic or diluted earnings per share of two dollars, and the stock is selling for 20 dollars per share, the P/E ratio is 10 ($20 per share divided by $2 earnings per share = 10 P/E).

Price-to-Book ratio (or P/B ratio) is a financial ratio, which is used to compare a company’s current market price to its book value.

It is also sometimes referred to as a ‘Market-to-Book ratio.’

Earnings per Share (EPS) is the portion of a company’s profit that is allocated to each of the outstanding shares of common stock.

It serves as an indication of a company’s profitability.

However, data sources occasionally simplify the calculation by quoting the number of shares outstanding at the end of the period.

Net Asset Value (NAV) is the value per share of an exchange-traded fund (ETF) or a mutual fund on a specific date or time.

With both types of funds, the per-share dollar amount is based on the total value of all the securities in the portfolio, any liabilities the fund has, and the number of outstanding shares.


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References  (Images via Pixabay)

Disclaimer and Disclosure

Throughout my blog posts, including this one, I mention bonds, ETFs, funds, stocks, and other investables that I either own, or mention for your general education and interest. 

In no way do I make any recommendations that you should go out and buy any of these instruments. 

Please do your own due diligence before committing money to any of these asset classes.

Please also read:




I hope you found this Investment Strategies:  Types of Investment blog post to be of value, and that you are now pretty excited about indexing as the way to go with your portfolio investment.

Please refer back to Dead Wgt. Exceeds Winners to review the two types of investment strategy that you have at your disposal. 

If you still have questions about the merits of indexing, please give me a shout.

If you would like to have private consulting lessons with me, you can reach me here.

Or, if you would simply like to engage me as your trading adviser, please use the contact link.

If you haven’t had a chance to go through my previous blog posts, please feel free to do so at your leisure: 


After Hours Trading

Trading Volume

Stock Trading Stops

Currency Trading Strategy

How to Pick Stocks

Stock Trading Rules

Three Winning Stock Trading Strategies

Forex Trading Techniques

Forex Pivot Points

MACD Divergence,

ADR Indicator

Best Forex Indicator

The HNW Club


Market Update

Margin and Leverage

Support and Resistance

Stock Market Forecast Next Five Years

Trading Forex News

SimpleFX Trading Tool

Stocks to Buy Today

And, feel free to check me out here.

If you would like to help me start a forum and be a moderator, I would love to hear from you.  Just drop me a line using the Contact provision at the bottom of my site.

If you would like to be featured in my blog, I would love to share your success story – or even your trading experience.  Please send me a message using my Contact form at the bottom of this page.

I won’t live long enough to know it all, and I won’t live long enough to make all the mistakes myself.  So, hearing your story will be most helpful not only to me, but also for my other beloved readers.

Please share this post.  Sharing is caring.  Thank you!

I look forward to your articles, feedback, ideas, stories, and suggestions for my blog.  Please post these on my blog at the Contact link below.  

HAVE FUN and ENJOY LIFE!  Remember – FAMILY comes first!

Here’s To Your Success and Quality of Life,


Peter R. Bain
PS:  Don’t let them steal your dreams!
PPS:  I will help you achieve your dreams!

About Peter R. Bain

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Peter R. Bain

I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.

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