My Investment Philosphy

When I first started to invest  I made all the usual investment mistakes. I bought on margin and traded options. Needless to say I lost money but it did make me a bit wiser. In the late 80's I managed to complete the securities exam, as well as the futures and options courses from the Canadian Securities Institute. I also read just about every investment book that I could get a hold of including those from the CFA. Unfortunately I did  not complete the CFA due to the difficulty of combining my engineering work load and the studies. I also worked as a stockbroker for about 18 months in the early 90's when I was temporarily out of work as an engineer.

To this day I still read widely on investment, general finance and economics. I have probably over 500 books in my library which I have digested over the last 25 years. I have also read many research reports, annual reports and the like. Needless to say I am a close follower of the investment world. I am writing this blog mainly for fun and it is my hobby. feel free to follow it as you like. Please do not consider anything written on this blog as investment advice. Refer to my disclaimer.

Since I started my own self directed retirement account many years ago I have acheived about 21% compounded investing in primarily common stocks trading on Canadian and American exchanges. I only had 1 negative year in 2010 when I was down 2%.

In point form here are my main investment rules:

• Invest in businesses that you understand well. For example I usually invest in engineering, construction or industrial companies. Stay away from investments that are complex or hard to understand. If you deviate from this rule do so with a relatively small amount of money.

• Do not diversify too much. I avoid Mutual Funds and ETF's. The fees charged (MER) by Mutual Funds are around 1-2%. Add in market making costs and other soft costs you could be starting off down 2% or more if you are into mutual funds. I have never been a big fan of diversification. Warren Buffett is on the record as to investing in "about" 5 to 6 companies that you know well. See his speech to the University of Miami which is on the web. I tend to agree with this approach. It makes sense to me but clearly it is not for everybody. It depends on your risk tolerance.

• Have a view for reasonable valuation. This is a tricky subject since it can be  difficult to determine exact value. Read Benjamin Graham and Awath Damodaran to get more guidance on this subject. Mr. Damodaran is a Professor at the Stern School of Business at New York University and has written widely on finance issues and business valuation. See this site: http://pages.stern.nyu.edu/~adamodar/

• Avoid trading on margin (borrowing money) and also avoid derivatives (options and futures) trading. Brokerage houses make a fortune in these areas. Avoid short selling since you have to post collateral. Generally speaking avoid stocks that trade less than $5 - there may be exceptions in Canada due to all the junior issues out there. Be careful though.

• Avoid excessive trading based on economic information. There might be some exceptions within business cycles and potential crises. Economic data comes out every day and if you try to "trade" the information you will simply make your broker rich.

• Invest in companies with strong business fundamentals. Stay away from a business that has storm clouds around it. Stay away from bankruptcies, turn-around situations and other exotic situations. Keep it simple. Research the stocks that you want to invest in. Read the annual reports, security filings and any other information you can get a hold of. 

• Try to avoid commodity based businesses, complicated high technology and businesses that are hard to understand. They are just too tough to value. Stay with a business that has a durable competitive advantage and consistent margins. Commodity based businesses have little pricing power and are vulnerable to wild swings in the underlying commodity (see oil in 2008 and early 2009). If you deviate from this rule do so with a relatively small amount of money.

• Avoid excessive trading. Market makers love it when you trade often. Unfortunately, there is no clear definition of what is "excessive" means. For myself I might make 5 investment decisions a year. I usually follow a small group of stocks that I have known for many years.

• When it comes to technical analysis or charting I am generally a skeptic. The methods used by the technicians does not seem very rational or scientific to me. Having said that I do look at the charts for many of my investments - I don't really have much choice - stock charts are located on almost every web-site or publication. However, I would honestly say it does not form the basis of my investment.

• I generally do not invest in Canadian (or US) bonds or notes. This includes government and corporates. I am not really sure why I am so averse to buying bonds - it is probably due to the low yields in recent years that has kept me away. This may change in the future as I slowly get more risk averse.  I also have never invested in REIT's. I am not against REIT's so this might also change in the future. There seems to be general sentiment that the secular movement in lower interest rates might be over and interest rates are headed higher. This might make REIT's and long term bonds a poor performer in the coming years. We shall see.