Do You Feel Lucky?

A fellow investing friend of mind (let’s call him High Flyer) likes to invest in penny stocks (i.e., share value less than a buck). And though he knows I don’t touch highly speculative stocks, he still likes to share his excitement with me. Every time he does so, I remind him that he may as well be laying bets at a Vegas roulette table given the high risk nature of companies with minimal revenue, profit, and business prospects. But High Flyer comes by his name honestly: he’s a gambler and gamblers get their kicks through taking risk that us non-gambler types shy away from.

A few weeks ago, High Flyer is telling me why I should I buy a company called Petrolia Inc. (CVE:PEA). PEA is a Canadian based oil and gas exploration company. In Canada, given the outsized contribution of the energy sector to the national economy, these kinds of companies are a dime a dozen, all eagerly searching for pools of black gold.

That said, the vast majority of them do not go on to find Alaskan sized gushers. Rather, they stay small, burn through money provided by seed investors (i.e., people who fork over the initial dough necessary to get the business running) and eventually shrivel and die.

Though High Flyer was his usual buoyant self when trying to sell me on buying PEA, I listened to his harmless ramblings in stride, eventually telling him I’m not particularly fond of flushing money into a sewer. Not that I expected High Flyer to follow my lead on this one. Because his style is to go it alone.

So, in keeping with his nature, High Flyer bought a fair amount of PEA shares. And yesterday, he calls again to inquire whether I loaded up on PEA, knowing full well I didn’t.

“That’s too bad,” he says with a glint in his eye (sure it was a telephone conversation, but I swear I could hear the glint).

“Why’s that?” I ask, playing the game, knowing he desperately wants to share his good news.

“Because they just announced payment of a one time 25% special dividend. Meaning, I just earned myself a 25% return in two weeks! And this is before the shares have started to take off! See, you should have listened to me, Mr. Bigshot BuddhaMoney!”


What’s Luck Got To Do With It?

Daniel Kahneman, Princeton psychologist, recipient of the 2002 Nobel Prize in Economic Sciences, known for his work regarding the psychology of judgment and decision-making, and for playing a significant role in creating the field of behavioural economics, wrote a bestselling book titled, ‘Thinking Fast and Slow’. For anyone who manages money (that would include, um, let’s see, well … just about everyone), and for anyone who wants to learn more about the chaotic and fascinating workings of the mind, the book is an informative read.

Okay, inadvertent book plugging aside, here’s a noteworthy comment from Kahneman:

“There is general agreement among researchers that nearly all stock pickers, whether they know it or not – and few of them do – are playing a game of chance. The selection of stocks is more like rolling the dice than like playing poker.”

Kahneman doesn’t believe that ordinary investors (i.e., if you’re not Warren Buffett, you’re ordinary; okay, slight exaggeration, but not by much) are able to beat market returns.

Disagree? Think your hand picked investments can perform better than an S&P 500 index ETF over the next 5, 10, 40 years? Maybe. But not likely.

Marketwatch recently reported that a mere 1 in 20 actively managed large cap (i.e., holdings include companies like Pepsi, Ford, Google, etc.) mutual funds beat returns of the S&P 500 index over the past 15 years. And across all fund categories, more than 80% did worse than an S&P 500 index ETF.

Add to this billionaire extraordinaire all time greatest investor Warren Buffett stating that, after he’s passed on to that hallowed place where genius investors pay no heed to earthly concerns such as money, his 80 or so billion dollars should be invested as follows:

“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)

I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

In the end, we all roll the dice. For some, however, (i.e., Buffett) the dice are loaded in terms of knowledge and information facilitating more advantageous decision-making. Yes, these people will lose on some investments, but they win more often than not.

As for the ordinary investor, our dice rolls are governed more by the Gods of Chance, and the Gods of Chance really don’t give a hoot as to whether or not you win or lose money, whether or not your bills are paid on time or not.

So before buying your next stock instead of the safe and boring (oh, but safe and boring are the best type of investments!) index fund, ask your self: do you feel lucky? And even if you do, know that the long odds point to you losing.


“Success = talent + luck; Great Success = a little more talent + a lot of luck.”

This is another quote from Kahneman who says that luck plays a large role in every story of success. Okay, if this is true and accurate, the challenge for investors is distinguishing between one’s own skill and luck.

Unfortunately, when short term success comes our way, too many of us attribute this to skill. And when we lose? Well, naturally, that’s just bad luck.

Actually, win or lose, like Kahneman says, it’s a combination of skill (or lack thereof) and luck. And to think otherwise means you are under the spell of that little something we call greed, accompanied by a healthy side dish of delusion.

For those who truly want to evaluate their investing chops, chart your portfolio over a period of at least ten years. Then compare results to the S&P 500 performance during the same time period. If you outhit the index, only then can you count your self among those whose skill plays a larger part than luck when it comes to investing.


High Flyer Grounded

PEA looks like a winner, short term at least. Not only did High Flyer earn several thousand dollars from the company’s special dividend payment, but the company will be reverse-splitting its stock (i.e., shares are merged to form a smaller number of proportionally more valuable shares) so shares that were worth 40 cents will now be worth $4.80.

The share merger in itself doesn’t make the stock more valuable but it does remove the company from penny stock ranks. In turn, this may serve to attract more retail and institutional investors who attach more credibility to non-penny stock shares. Once again, in turn, this may serve to lay a foundation for further share price increases should the company’s business perform well.

Notice my use of the word “may”. Because there are no guarantees. High Flyer is still rolling the dice, even though these dice now appear to be slightly more advantageous.

And if PEA shares zoom, well, good for High Flyer. He could use a win. Because for every winning horse in his stable, he’s had five who’ve been taken out to pasture. That’s what happens when you roll the dice often: you win some, you lose lots.


Inside An Investor’s Mind

Little more than one year ago, I bought shares in Canada’s largest airline, Air Canada (TSE:AC), at about $9 per share. At the time, my investor geek friends (naturally, I count myself among the geeks) questioned whether jello had replaced the brain previously inhabiting my head.

Historically, you see, the airline industry has not been friendly to investors. That, I suppose, is putting it mildly. For the brutally honest take, lets defer to legendary investor and gazillionaire, Warren Buffett, who called the airline business a ‘death trap’ as recently as 2013.

From one notable quip to another, Buffett offered this in your face sketch:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money.”

So … if I haven’t been invaded by jello, what makes me think I know more about investing than Buffett?


Research, Research, Research, Before You Buy

Let’s get this out of the way: I fully recognize the limits of my investing chops. Besides, comparing myself to Guru Buffett? Really? He’s a self-made gazillionairre. I’m not. Enough said.

Then what was I thinking?

To start with, life is nothing if not teeming with change. And that includes the aviation industry. So when I read a research report issued by TD Securities (TSE:TD)(TSE:NYSE) that argued the case for AC, saying that the airline was massively undervalued, and slapped a $21 target price on a stock hovering around $9, I took notice.

But, hey, it’s just a research report. And it’s essential to keep these reports in perspective, to understand that the company issuing the report may be self-interested (i.e., they may own the stock directly or through a subsidiary). That if you have ten securities companies issuing reports on one publicly traded company, often, nine will have a ‘buy’ or ‘hold’ recommendation and one lone voice will issue a ‘sell’ recommendation.

What does this all mean? While stock analysis may be informative, prudent and reasonable, it’s also self-promotional. By way of research reports, analysts do what they can to support the investment industry, to get investors to enter and stay in the game.

So while TD’s report was intriguing, it wasn’t enough to convince me to buy AC.

And the $21 target price? Which was more than double the current value?

Every investor must absolutely, positively, take these with a healthy grain of salt, skepticism and doubt. If I’m not making myself clear, how about this: Do NOT make investment decisions based solely on a stock analyst saying a certain stock is about to lift off, destination moon.

Because here’s the thing about target prices: they’re educated guesses, nothing more. Granted, securities analysts have access to more information than your typical investor, and may have more of an understanding of a particular industry and inner workings of a particular company. But, and this is hugely important, they do NOT know where a stock is headed, no matter how confident and blustery they appear.


Off Target

Consider a research study published in 2006 by Mark Bradshaw of Harvard Business School and Lawrence Brown of Georgia State University. These two guys examined nearly 100,000 12-month price targets issued by analysts from 1997 to 2002.

And here’s what they found: only 25% of stocks were at or above target at the end of a 12 month period; and less than 50% of stocks exceeded the target (then fell back) at some point during the 12 months.

This is their conclusion:

“Target price forecasts are overly optimistic on average, and … analysts demonstrate no abilities to persistently forecast target prices.

This evidence is consistent with prior findings of low abilities of various experts to forecast interest rates, GDP, recessions and business cycles, and the infrequency with which actively managed funds beat the market index.”

Okay, fine. Then are price targets and analyst reports of any use? Sure. Read the reports. Understand the rationale for slapping on a high price target. But don’t be sold. And certainly don’t let these reports be your only information source upon which investment decisions are made.

Getting back to AC, reading TD’s report was step one. After which I reviewed AC reports issued by other securities firms; researched and compared other airlines based within Canada, USA, and elsewhere; and read domestic and foreign newspapers, searching for information about the airline industry. And after taking time to digest all this information, I made the decision to buy AC.


The Times, They Have A Changed

It just so happens that as I was contemplating purchasing shares in AC, Warren Buffett was considering buying certain American based airlines. And after word got out that Buffett invested nearly $10 billion in four airlines in late 2016, he had this to say:

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.”

As an investor, what did Buffett’s considerable investment do for my psyche, for my decision to buy AC? Reflexively, I experienced a boost, felt good about my call. ‘Hey, look at me, I got in the game before Buffett.’

Then I talked myself down. I mean, what did it really matter that I spotted an investment opportunity before Buffett? It meant nothing other than I may have had access to some similar information. And just because Buffett is buying airlines, that in itself is no reason for me to buy. Because my investment objectives are likely different than his. Because he can afford to lose $10 Billion, and I’ll be hurt if I lose a lot less. And most importantly, even though Buffett is an investing genius, he’s human (gasp!) – no, really, he is – and he too experiences losing investments.



Higher and Higher … Not

This week, nearly one year after my buy of AC, the stock soared to $22. More than doubling my money. Well, look at that, the TD analyst was right! Uh huh. And on 50-75% of his other predictions he was wrong. So, as my teenage son would say: whatever.

Still, I have to tell you I was feeling good. To my thinking, I bought low, and sold high. The perfect trade. And I rode that wave of satisfaction for about 24 hours. Because the next day, I read a new report issued by TD. Seems that they have now upped their target price to $34. Other securities analysts have also increased their target price, most to the mid and upper 20s, with one lone voice calling for a fall back to the teens.

And for a few minutes after reading these ambitious price targets, jello does jiggle my brain. Suddenly anxious, I’m thinking, uh oh, did I sell too early? The analysts say AC stock is going even higher! I could make even more money! Oh no! Why did I sell?!

The insanity then passes. BuddhaMoneyLama takes hold, reminding me that greed sucks. Telling me to be grateful for my good fortune, for my wisdom to sell at a peak. All is good now. Mental balance returns.

Will AC go higher still? Maybe. Do I care? No. Because I’m no longer invested. Because I’m satisfied with my profit and am now looking forward to investing the proceeds in other companies that offer better value.

And I’m certainly not buying the analysts bluster that the stock will now rise another 75%. I mean, this is what analysts do. If they’re lucky enough to make a correct call on target price, as soon as the price is reached or within spitting distance, they raise their target even higher. ‘Hold forever; the stock will go up, up, up!’ And they do this because it’s their job, to entice more people to invest in the stock market.

Here’s what I have to say to that: don’t succumb to jello brain. Once a security has reached YOUR target price, whether on the upside or down, stay disciplined and sell. Say thank you very much. And move on to the next investment.








The Stock Market’s Dark Side

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked …

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked Tesla’s share price, saying it is “higher than we deserve.” Whether true or not, to publicly state that your company is not worth its current trading value is not only rare, it’s virtually unheard of. It’s just not what a CEO does.

Because in addition to assuming responsibility for day to day operations, a CEO also acts as a company’s primary media pitchperson, head cheerleader, numero uno fan, selling the company’s virtues to the public and financial analysts. And always with a positive spin. Unless you’re a rare breed known as Musk, so it seems.

Sales, Man, That’s What Corporate Life Is All About

I’m not here to riff on corporations as evil entities myopically bent on achieving profit and maximizing shareholder value, all the while paying little heed to contributing to the social good and society at large. To varying degrees, some companies adhere to a social conscience, others don’t. For better or worse, such is the diverse nature of organizations, and humanity.

Still, regardless of how much or little a for-profit company gives back to its employees, communities, and our world, they all share something similar: they’re in the sales business. Whether selling goods or services, companies need sales to generate revenue to turn a profit to stay in business. And selling involves promotion, marketing, and advertising. And if you have a media friendly CEO, well then, all the better for driving sales, all the better for business because that CEO’s favorable image connects with consumers, persuading consumers to use, watch, listen to, or wear a company’s product.

Think Steve Jobs and Apple. Media loved writing about Steve, and Steve knew how to play the media, to manufacture himself as a near mythical legend, and position Apple as not only best in class but in a class of its own worthy of sticker prices considerably higher than rivals products. This sort of image making, however close or far removed from reality, impacts consumers buying habits and investors desire to own the stock, and consequently bid up share price.

Now, I’m not saying that Steve wasn’t a genius visionary or that Apple doesn’t make exceptional products. Instead, what I am saying is that you can have the most excellent product or service on the planet but if relatively few people know about it, and sales lag, then the company will soon fade away.

Apple doesn’t have that problem. They remain as extraordinary at the sales game as they are at manufacturing. And to this day, their image among consumers remains intact, best in class. As does their market value, which is higher than any other company on this planet, by far.

Promotion, Man, That’s What The Stock Game Is All About

Whether you’re a stock market behemoth like Apple or Google (NASDAQ:GOOGL), or a teeny tiny penny stock, in one way or another, you’re promoting your stock, i.e., you’re selling the merits of owning your stock because you want more buyers than sellers; this is how share price marches upward.

The typical medium in which behemoths promote their stock is mainstream media. Be it an interview with the CEO, a quote, a prediction as to what comes next in the stock market or economy, an annual meeting turned Woodstock for Capitalists (i.e., Berkshire Hathaway’s (NYSE:BRK.A) annual shareholders meeting), or a product unveiling (i.e., Apple’s annual Worldwide Developer’s Conference).

And while the CEO may firmly, honestly, believe in what they are promoting, we the consumer would be wise to interpret their words with a grain or two of salt. Because they’re just words. In the investing game, words are not enough. Not even close.

Numbers, not words, tell the story. On a basic level: Revenue, Expenses, Profit, these matter more, so much more, than words. I mean, words can be beautiful and flowery and convincing, and we’re all susceptible to oratory charm. But it’s important to see words for what they are, and in the financial world, words decidedly take a back seat to numbers.


When The Numbers Don’t Add Up, Run!

Penny stocks are a different animal.

Technically, a penny stock is defined as any stock that trades for less than $5 / share. But for our purposes, a penny stock is one that trades for less $5 / share AND is not listed on a major stock exchange AND is a small company AND is often illiquid (i.e., relatively few shares are traded each day, making it difficult to buy and sell).

Now here’s the dark side of penny stocks: scammers LOVE them! And they can make a small fortune off people who don’t know any better, people who chase pots of gold and ends of rainbows, people who lay their bet on spam email promoting the latest and greatest 10 cent stock promising to power through to $10 or $50.


The typical penny stock company touted by scammers? Little to no revenue, little to no shares traded daily, little to no business prospects.

And the angle, the hitch, the hook? The company says (words, words, words) that it’s changing its business model and is now in a HOT SPACE. For example, if the price of gold takes off, the company will morph into a gold mining company. If biotech is hot, you guessed it, the company reinvents as a biotech company.

Then, if it’s a big time scammer, they pay a promoter(s) serious coin (we’re talking hundreds of thousands to millions of dollars) to scream about the INCREDIBLE, UNBELIEVABLE, FANTASTIC investment opportunity presented by this itsy bitsy shell of a company. And the promoter(s) sends out millions of emails, many press releases, and arranges for inclusion in hundreds of investment newsletters and stock chat rooms. This is the modern version of a boiler room (i.e., refers to a bunch of guys [rare for women to engage in this activity] hard selling stocks to random people over the phone – well depicted in the movie, Wolf of Wall Street).

Once the word is out, once enough people have been suckered into becoming buyers of this worthless stock, the scammers start selling. Because, you see, before all of the promotional activity was set up, the scammers arranged for most, maybe all, of the issued stock to be in their name or, if sophisticated, the name of a faceless corporation. The faceless corporation gives them cover from regulators who have rules regarding the boundaries of promotional activity.

And if the CEO of Penny Stock Corp. says he doesn’t know who is behind the promotion, and the regulators cannot identify the promoter, then Penny Stock Corp. CEO has no worries. And he dumps his stock to pie in the sky investors who bid up the price. Until, that is, buying momentum halts, selling ensues, and stock price craters in a matter of hours or days.

The Case of Dry Ships

But you need a real life example. So let’s briefly describe what happened recently with a company called DryShips Inc. (for the full story, check out the detailed accounting here).

In November, 2016, DryShips disclosed a huge loss and suspended debt payments to preserve liquidity. Shortly after, the company, with a market value of close to $5 million, didn’t just catch fire, it was a veritable inferno! In just four days, the stock price leapt more than 1500%!

On November 8, its stock was priced at $5107, with a grand total of 38 shares being traded. Two days later, price jumped to $13,328 with more than 5,000 shares traded. Come November 15, price it $81,760 with more than 9,000 shares traded. By November 29, price had tumbled to $4849.

The journalist who wrote the article referenced above ends his story by referring to the “stock’s mysterious rally.” Well, other than being able to prove who was pulling the scam strings, there’s no mystery. The stock blasted higher owing to deceitful manipulation and nefarious promotional activity. Because absolutely nothing related to the company’s business activity justified a massive move in volume and price. And at the end of the day, guess who loses? Right, Joe/Jane Investor who were suckered into buying worthless paper.

As an investor, you do not want to get anywhere near this kind of stock. So please do your best to ignore any spam investing emails, ignore talk of a stock being “the next Facebook”, ignore any and all penny stocks because buying penny stocks is akin to gambling, not investing, and nine and half times out of ten, you will not exit your stake a happy camper.

Canadian Bank Stocks Rock

On the global stage, Canada is a minor player. And going by the numbers, you may not expect much on the economic front: with a population (36 million) less than California, Canada ranks 10th for gross domestic product (GDP); and 32nd for GDP per capita. But numbers alone don’t tell the whole story. The thing is, on several fronts, seemingly polite Canadians don’t hesitate to punch well above their weight.

Incredible Cash Machines

For those with a long term investing horizon (that should be everyone, since investing is a long game), who believe that capitalism is going to stick around awhile, the population will grow owing to domestic baby creation, immigration, and ever increasing life spans, and that consumers and businesses will continue to rely on financial institutions … you can’t go wrong with the big five Canadian banks.

These are hulking, multinational corporations operating in a well-regulated (i.e., government oversight) home environment. These are companies that churn out profits to the tune of 1 to 3 BILLION dollars every three months. And who give back to shareholders in the form of dividend increases and share price growth.

On a stock risk/return measure, there isn’t a much safer bet.


Closer Look

  • Consider Royal Bank of Canada (TSE:RY)(NYSE:RY), Canada’s largest bank with a $137 Billion market value. Though more than half of its revenue is generated from domestic operations, this is expected to change in the near future as RY has significant American based operations, as well as conducting business in 35 other countries.

Adjusted for stock splits, in 1998, RY traded above $22. Today, it’s trading at $92. And while you’re enjoying the stock ride, every quarter the bank pays a healthy dividend to shareholders. During the past 17 years, dividend payments have increased from 13.5 cents per share to 0.87 cents per share. Typically, dividends are increased twice/year, because they make so much money! Currently, the percentage dividend payout is about 3.75%.

  • Next up is Toronto-Dominion Bank (TSE:TD)(TSE:NYSE), nipping at the heels of RY with a $118 Billion market value. TD also maintains a large American presence and is now counted among the top 10 banks in the USA.

Adjusted for stock splits, in 1998, TD traded at above $8. Today, it’s trading at $63. Like RY, dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from 10.5 cents per share to 0.60 cents per share. Currently, the percentage dividend payout is about 3.8%.

  • Bank of Nova Scotia (TSE:BNS)(NYSE:BNS) is the most international of the Canadian banks. With a market value of $92 Billion, BNS operates in 55 countries not including the USA.

Adjusted for stock splits, in 1998, BNS traded at $34. Today, it’s trading at $76. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $1.00 per share to 2.88 per share. Currently, the percentage dividend payout is about 4.0%.

  • Bank of Montreal (TSE:BMO) (NYSE:BMO) sports a market value of $61 Billion and has substantial US operations.

Adjusted for stock splits, in 1998, BMO traded at $32. Today, it’s trading at $93. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.25 per share to 0.90 per share. Currently, the percentage dividend payout is about 3.8%.

  • Canadian Imperial Bank of Commerce (TSE:CM)(NYSE:CM), weighs in at $42 Billion market value. Outside of Canada, CM has operations in the USA, Europe, Asia, Australia, Latin America, and the Caribbean.

Adjusted for stock splits, in 1998, CM traded around $36. Today, it’s trading at $106. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.33 per share to 1.27 per share. Currently, the percentage dividend payout is about 4.8%.

What To Buy and When

You’ll get opinions all over the map on the issue of which bank stocks offer the best investment potential. Although I’m not about to throw my hat in the ring here, I will say that sound arguments may be made for any of the banks listed in this post. And if you can’t decide which one belongs in your shopping cart, then you may want to opt for one of the following exchange traded funds (ETF):

  • ZWB, Covered Call Canadian Banks, issued by Bank of Montreal, currently pays a +5% yield with a 0.72% management fee.
  • XFN, S&P/TSX Capped Financials Index, issued by iShares, currently pays a 3% yield with a 0.55% management fee.


The Magic Key: BUY ON SALE!

Whether you buy an individual bank stock or an ETF, your portfolio will greatly benefit from patience.

Currently, bank stocks are trading at about 10% off their 52-week high. This is what I call a middling discount. It’s a decent entry point and you’ll do well in the long run. But you’ll do better if you wait for a deeper discount like what was on offer in January, 2016, when bank stocks were beaten up, so much so that their dividend yields were between 4.5% – 5%, which is a fantastic yield for companies of this quality and size.

If You Can’t Beat ‘Em, Join ‘Em

Sure, there are valid complaints about bank fees and services, and sometimes banks do jump offside, strong arming consumers to pay for unnecessary services. And that’s a topic for another day. For now, from a practical investor perspective, it sure is worth your while to own some of these incredible money making machines.

Think about it: you know those monthly fees you pay out of pocket? Well, wouldn’t it feel better to take from the bank’s pocket, in the form of quarterly bank dividends, to cover the cost of those fees and more? That said, as good as it feels, there are bigger issues at play than taking satisfaction from reaping financial revenge.

Canadian banks offer boringly, consistent profitability. When financial institutions around the world were melting down in 2007-2009, Canada was held up as the model banking system and its banks as the model banks. Yes, Canadian bank share prices were hammered during this time but that was only because investors predictably panicked (in retrospect, this time period was an extraordinary buying opportunity). The banks themselves were never at risk of harm.

Boring isn’t a problem. In the world of investing, boring is often exactly what you want. You want the unassuming turtle portfolio that grows little by little, year after year. The one that makes you wealthy.


Enter Buddha

Be patient and wait. Ordinarily, the mind does just the opposite. Grumbling for that which has not happened. Complaining, not grateful. Desiring instead of creating the capacity to receive. Create the capacity to receive and much will happen.


Investors Magical Thinking

I have a friend named Ben (Magician Ben) who seemingly possessed unearthly wisdom together with emotional fortitude sufficient to resist Facebook’s (FB) IPO hype onslaught back in May, 2012.

Instead of rushing to buy some of the more than half a billion shares trading on that first day at a price anywhere between $38 – $45 (USD), Magician Ben waited on the sidelines, biding time. And during the next three months he continued to wait and to watch as FB’s market price plummeted. As of September 4, 2012, the stock had shed about 60% of its initial value, closing at $17.73 (USD).

The next day, Ben had a feeling that now was the time to get into the game. Acting on intuition, on a hunch that FB had hitched itself to a shining light hovering not far above Bethlehem, he bought $50,000 worth of shares at little more than $18 (USD) a piece. Then he hurried back to the sidelines where he resumed waiting.

More than four years later, seeing that FB was trading above $130 (USD), Ben considered whether to hold or pull the sell trigger. Calculating that his investment had now risen eight-fold, he was pleased to see that selling his shares would net serious money, even after paying capital gains tax.

Yet, Magician Ben wanted more. He wanted FB to make him a multi-millionaire, an after tax multi-millionaire, a thank you-very-much-Mark Zuckerberg-for-allowing-me-to-retire-early-multi-millionaire. His head bobbing about among dream clouds, convinced that FB had been anointed chosen stock of the 21st century, Ben made his decision. His gut told him to hold, that FB’s ascension had a ways to go. There would be no gun smoke that day.


Magical Thinking

Ahh, magical thinking. Arriving at conclusions based on little more than … thin air, fantasy, delusion. Regardless of the investment merits of FB (and any other investment for that matter) what’s concerning is that Magician Ben’s genius lay in little more than wishing upon a star.

Okay, you say, but so what? The fact is that Magician Ben called it right. Just look at the results! Given FB’s impressive run, isn’t it fair to say that his crystal ball is the real deal, that genius may be extrapolated from his prescient sixth sense, that his forecasts will continue to be accurate and Magician Ben’s dream will come true?

Not exactly. Gain or loss does not prove whether the decision to invest was ‘right’ or ‘wrong’. Rather, the usefulness of the rear view mirror is limited to showing how an investment fared. In the long run, if Magician Ben is to manage a successful portfolio, if his stable of stocks are to produce more winners than losers, he will need more than intuition to form the basis of his decision-making.



All About Process

Investing is far from an exact science. It’s an art form. It always has been and will remain an art form, meaning that it is interpretive, allowing ample room for differing approaches and paths to success.

Even Magician Ben’s wishful thinking approach qualifies within the investing art’s broad parameters. However, although it is easy to implement and commonly employed, reliance on intuition alone, without any substantive support, is foolhardy and ultimately doomed to fail.

Consistently successful investors rely on a process for choosing securities. Within the framework of an investment process, the investor starts with an idea that, on the surface, appears to be an opportunity.

Then research is conducted, far beyond the writings of an analyst tout, crowd jubilance or a popular media outlet in the business of attracting reader eyeballs through loud promotion. The process is relied upon for as long as the investor holds a particular security, guiding the investor through to the time of sale.

Knowing that a closed mind is a dangerous mind, the investor gathers and analyzes objective facts and remains open to evaluating all relevant information. Regardless of what kind of securities market analysis is utilized (i.e., technical, fundamental, macro, behavioural) or what type of investor you profess to be (i.e., growth, value, income, contrarian, momentum), information should include that which does not support preconceived theories or biased feelings.

Tellingly, investing legend George Soros (he of the many, many billions) is known to review and reflect upon at least one contrary opinion before deciding whether to proceed with an investment.

So, would anything change for Magician Ben if he was diligent and relied on a rigorous process when investing? Well, the frustrating answer is … maybe. Since there is no perfect investment process, one that generates profit from every investment, the best an investor can do is stack the odds in their favor.

Investor’s Oath

Every stock market investor experiences loss. Without exception. Not once or twice but many times. Loss is part and parcel of the game. That said, successful investors win more than lose. They do so by staying disciplined.

They consistently execute their process, knowing that sticking to their road map reduces, or even eliminates, poor decision-making and ill-informed trading. Through strict adherence to the process, through honoring the Investor’s Oath, i.e., thou shalt do minimal harm to thy portfolio, the investor increases the odds of success.

Because the portfolio will suffer losers, a well thought out process plans for the inevitable. It prepares for loss by deciding beforehand when to fold. While this knowledge is essential, it is only a first step. The second and crucial step involves staying disciplined, selling at a pre-determined price.

Such a plan might look something like this: when a stock is down fifteen percent from purchase price, it is automatically sold thereby rendering magical thinking impotent. By letting go of hopes and dreams that a losing stock will rebound, by accepting loss and moving forward before the possibility of market carnage sets retirement plans back a few years, the winning investor limits downside and juices the odds that total portfolio gain will outweigh loss.

Running Interference

Investment process, comprehensive research, objective decision-making, discipline, all of these are essential to the winning investors playbook. And what would help even more would be an entirely rational mind, one divorced from errant thinking and destructive emotion.

However, investors are human too. Knowing this, and knowing that even superstar investors get sidetracked, winning investors study their own behavior so as to minimize the effect, or prevent the occurrence, of one or more of the following obstacles to success:

  1. Optimism. Under most circumstances, optimism is considered to be a positive trait. However, it may become troublesome for investors when it leads to an unrealistically rosy view of themselves and the future.
  1. Overconfidence. Often stemming from the illusion of knowledge, and overlapping with optimism, over-confident investors may fail to realize that their knowledge is limited, tend to chase returns, and underestimate risk.
  1. Anchoring. After forming an opinion based on limited information, the investor is not willing to change that opinion regardless of new information.

Anchoring inhibits the investor from searching for evidence contrary to their opinion and even if found, this evidence is often dismissed.

It causes an investor to stick with a losing investment or not buy a fundamentally strong company because, for example, they have determined that its price/earnings ratio is too high or are irrationally attached to some other numeric metric that does not meet arbitrary criteria.

Ambiguity. Investors prefer certainty. Unfortunately, the stock market is not in the business of offering certainty.

To compensate for lack of conviction in decision-making, an investor will seek expedient authority (i.e., media, experts) supportive of their position instead of taking the initiative to dig deeper on the research end.

  1. Herding. We are programmed to feel that the consensus view is the correct view. As a result, most of us are hard wired to follow the herd. Big mistake. You have heard it umpteen times: the crowd buys high and sells low, thinks like a lemming and is prone to falling off a cliff. As an investor, having the strength to break from, or not blindly follow, the crowd will serve you well.

Did I Mention Having A Process?

Today, FB is trading above $150 (USD). The higher the stock price goes, the more Magician Ben believes it’s ascent is never ending. Maybe Ben will be right. Probably not. And he’s a fool for at least not taking some of his enormous profit off the table by selling some of his shares.

But such is human nature when greed comes in to play. Risk is underestimated, or even ignored. And 9 times out of 10, Magician Ben will get burned by his delusional overconfidence. Maybe not with FB, given that many tech stocks are rocketing to the moon just now.

Then again, stocks are notorious for running out of fuel and, in turn, conforming  to the laws of gravity. And this is why an investment process would serve Magician Ben well in the long run. Because all magic carpet rides eventually come to an end.


Enter Buddha

Greed is an effort to stuff yourself with something: be it money, sex, power or food. Greed is the fear of inner emptiness. One is afraid of being empty so one strives to possess more and more things. One wants to go on stuffing things inside so one may forget one’s emptiness.

With less greed, there will be fewer possessions, and more joy, more music, more dance, more love. People may not have many gadgets but they will be more alive. As long as we relentlessly accumulate gadgets, the soul goes on disappearing.

Cheat Sheet to Stock Investing

This really smart guy I know, lets call him Really Smart Guy, has made a whack of dough through his business. He’s married with two kids and owns a beautiful house in a so-called desirable neighbourhood in stunningly beautiful, and outrageously expensive, Vancouver, British Columbia, that’s worth a few million bucks. His excess cash he shovels into residential real estate, buying homes and renting them out.

Why residential real estate? I’ll leave that one alone for another blog entry, since the topic demands a space all its own. For now, let’s just say that Really Smart Guy bought into the conventional wisdom that bricks and mortar is always a good investment. And for the most part, he’s done well.

Is That a Brick In Your Head?

The other day he was talking to me, telling me how he sold two properties at a slight loss. Feeling sorry for himself, he says to me, ‘you know, if I had invested the same money in Royal Bank of Canada back in 2008 (Canada’s largest publicly traded financial institution with a market value of about $140 Billion Canadian dollars [RY:TSE] – or about $107 Billion of the more valuable American paper [RY:NYSE]), I would have tripled my money! Shoot, I’d be really rich by now!’

Chewy Bit

Every publicly traded company (i.e., company listed on a stock exchange) is given what is known as a ‘ticker symbol’. The purpose of a ticker symbol is to identify a particular security listed on a particular stock exchange. The ticker for Royal Bank of Canada is RY. Since it is listed on two stock exchanges, RY:TSE indicates Royal Bank of Canada, Toronto Stock Exchange. And RY:NYSE, indicates Royal Bank of Canada, New York Stock Exchange.

I’m listening to Really Smart Guy, not saying anything. But I’m processing what he just said, ‘I’d be really rich by now’. And I say to myself, Wow.

Here’s someone who owns his own business, runs his days however he wants with no one telling him what to do, he and his wife and two children are all healthy and thriving, and he’ll likely never have to worry about paying rent or a mortgage, putting food on the table, or providing shelter or clothing to himself and his family. Not only are his basic needs taken care of but he has the wherewithal to satisfy most any other need or want.

Batshit Blind

Yet, Really Smart Guy doesn’t see it this way. He’s already sailing with the top 1% but that’s not enough. He wants more. He wants to be ‘really rich’, whatever that means to him.

Channeling Buddha, I say to myself, okay, here’s a person who’s filthy rich and doesn’t know it. What should I say, what should I do? Well, my perpetually smiling friend tells me:


Enter Buddha

There is nothing ‘to say or do’. Really Smart Guy is on his own path. Who are you to tell him to be grateful for what he has, for what he’s accomplished? Maybe his perspective will shift one day, maybe it won’t. Either way, your role is not to offer unsolicited advice about living life. What you’re here for is to offer investment advice; that’s the only thing Really Smart Guy asked of you.


This Way or That

After some more talking about how rich he could have been if only he knew then what he knows now, Really Smart Guy tells me he has never invested in the stock or bond market and he wouldn’t even know where to start.

I get it. There’s so much noise out there coming from mainstream financial media, banks, investment houses, mutual fund companies, exchange traded fund companies, financial newsletters, economists, analysts, central bankers, blogs (except BuddhaMoney, naturally), advertisements, well-meaning but misinformed friends …

… and the noise can be persuasive, pulling you every which way, screaming at you to BUY this; SELL that; stocks are best for the long run; balancing stocks and bonds is essential; buy gold, dump everything else, the system is crashing, paper money will soon be worthless; no, no, no, cash is your best friend; mutual funds are the only way for most people to adequately diversify; scratch that, mutual funds are too expensive, buy me, I’m an Exchange Traded Fund (ETF) that is essentially a mutual fund that charges you lower fees; global markets are down 4% and falling fast, the sky is falling, sell SELL!; global markets are up 4%, sunny days ahead so buy now while stocks are on sale, buy stocks, buy real estate, buy commodities, buy, buy, BUY!

If you want to ride an emotional rollercoaster and in the process drive yourself completely nuts, read these kinds of headlines everyday. That said, because you’re here, cozying up to BuddhaMoney, I assume you shimmy toward inner peace and balance. Bravo.

And if you’re a daily follower of the markets frenzied gyrations then, at this very moment, you agree to take a solemn vow to change this behaviour, to stop allowing mainstream financial media to push your emotional buttons, simply because it will be good for you, good for your BuddhaMoney soul, to shut out the noise.

Still, how do you know what to tune into and what to tune out? What sources are objective and reliable, not touting their own self-interest? How do you know what to buy/sell, when to buy/sell, how much to buy/sell?

Check out our next blog post (ahhh, the cliffhanger), I’ll be talking more about stock market investing, where to start on your investing journey, and how to figure out what’s best for you.